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Working Capital: Lessons from ACT Conference

Working capital management is the biggest single opportunity for in corporate treasury today, e.g. “2018/19 PwC annual working capital study” showed that € 1. 3 tr could be released from the balance sheets of global listed companies by addressing poor working capital performance.BUT 

  • Converting cash is becoming harder: While revenues are up by 10% on last year, this year we’ve seen a decline in companies’ ability to turn higher revenue into casH
  • Capital expenditure is continuing to decline: Capital expenditure (capex) as a percentage of revenues has plummeted during the last five years, suggesting that companies are managing cash flows by cutting investment.

Yesterday’s Association of Corporate Treasurers’ Working Capital Conference 2018, sponsored by NatWest was well attended - over 150 attendees - and produced some key lessons, facts and figures about working capital management, but was inevitably taken up with repeated references to Brexit: 

  • Overall:
    • What gets measured, gets done:
      • in working capital management companies need to measure what is going on right now. Then and only then, can companies start to manage
      • companies don’t need expensive consultants to do this for them
      • once the full position is known then it can be managed
    • Cash is being stockpiled worldwide as companies continue to be cautious
    • Corporate treasurers think they own cash (but there was some doubt about this)
    • working capital programmes are messy with attention to boring details needed (and not glamorous like launching a $200 million bond) 
  • Supply chains 
    • Global review by David Henig, Director, UK Trade Policy, gave a gloomy view about Trump and China, etc.; his closing comment was “There will be not quite complete chaos.” 
    • Need to understand your whole supply chain, not just the parts that you deal with directly because you could be vulnerable to what happens with them. (NatWest were promoting their new service, which is coming next year, that will help companies map all the suppliers in their supply chain.)
    • Corporate cannot assume that the funding in their supply chain finance solution will continue, need to check
    • Using an independent supply chain platform with separate funding arrangements with banks, etc., is safer than going with a bank platform
  • Working capital programmes
    • First need to convince senior management
    • Holistic approach is essential so the whole programme works together
    • Must also track unearned discounts as well as the invoice processing, etc.
    • Convincing the whole company is vital
    • Working capital programmes normally take 6-12 months to implement but in some cases (particularly if the company has multiple sites) 2-3 years
    • Regular reports on working capital programme progress, for all parts of the organisation, are essential
    • The programme needs to be ongoing so immediate improvements are not lost
  • Sources of supply chain finance:
    • There are many different types available and many different players, no agreement as to which supplier is better for which type of corporate 
    • Unappreciated suppliers include:
      • Elcom
      • Credit insurance suppliers. e.g. Marsh
    • Peer2Peer lending is not here yet
  • Cash flow forecasting is difficult and no-one has a complete answer, it requires, like all things in working capital management, continuous and boring attention to detail:
    • Make sure people supplying the data understand how and why it is used
  • Late payments debate (by large corporates):
    • Large corporates do not understand why setting extended payment terms and then paying on time still impacts the SME.

CTMfile take: Working capital management is not glamorous but the returns from successful and continuous WCM programmes are huge and mostly produce much more than the other things in corporate treasury.

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