Optimising working capital to drive growth in post-pandemic ASEAN
For the past 10 years, driving greater efficiencies within the treasury function has been the number-one objective for most businesses, especially manufacturers. This is notably the case when it comes to managing working capital, as treasurers strive to achieve ‘Just-in-Time’ inventory management to optimise liquidity and bolster their cash positions.
Yet new and ongoing external headwinds, some of which have gained intensity recently, are forcing treasurers to re-think this approach. These include geopolitical tensions, supply chain disruption, rising shipping costs, and increasing costs, along with interest rates hikes.
Additionally, buyers are looking to extend payments terms to preserve liquidity, which adds further working capital pressures on sellers.
New approaches needed
Panellists at the recent Standard Chartered Cash and Trade Finance Digitalisation Webinar noted how optimising working capital, to build business resilience and fund future growth, is a key focus for treasurers today. A poll conducted among webinar delegates revealed that interest rate hikes and supply chain disruption risks are the industry’s top two concerns.
In response, webinar speakers suggested a move towards ‘Just-in-Case’ (JIC) inventory management. This will help build resilience into supply chains, given that the pandemic and other macro events have exposed greater fragility in the ecosystem.
The scale of this shift to JIC is noteworthy – not just in ASEAN, but globally: research by PwC highlights how in 2020, net working capital (NWC) days experienced a five per cent spike year-on-year, while 2020 also saw a seven per cent increase in both Days Sales Outstanding and Days Payables Outstanding (DPO). NWC for the entire 12 months of 2020 totalled an estimated EUR 5.5 trillioni. Sectors that were particularly impacted in ASEAN included industrial manufacturing, whose inventory positions increased globally by 6.8 days between Q2 2019 and Q2 2020; and consumer goods, whose inventory positions grew globally by 1.1 days between Q4 2019 and Q2 2020ii.
Unlocking improvements
As businesses continue on the path to post-pandemic recovery, they will increasingly embrace supply chain redundancies, further leverage technology and digitalisation, and employ a holistic approach on working capital management through key indicators such as the cash conversion cycle (CCC).
Panellists shared their views on how best to release trapped working capital to fund future growth amid ongoing volatility. In the experience of Daryl Wang, Chief Financial Officer, PwC South East Asia Consulting, treasury teams cannot be a standalone department. Adopting holistic collaboration is therefore important. Wang emphasised that this approach should expand beyond treasury, such as accounts payable and accounts receivable, but to the broader finance department, especially tax, as well as across the entire organisation. This will enable the treasury function to get more timely and forward-looking information, and create more cross-teams ideation opportunities to optimise working capital.
Teams should leverage present-day solutions to optimise other functions. With access to timely and relevant data for instance, treasurers can forecast sales more accurately, as well as the inventory required to fulfil customer orders. New software that can be accessed remotely is also enabling new ways of working for treasury teams: where previously mission-critical tasks, such as the creation of financial forecasts or auditing, were conducted strictly onsite, today they can be performed from anywhere. While this is advantageous, Wang cautioned that governance frameworks must be updated, and controls automated to keep up with increasingly virtual treasury processes.
Reduce the cash conversion cycle
The switch to JIC inventory management has prompted many manufacturers to seek out third-party solution providers. These providers can help ease the liquidity pressures associated with extended CCCs. To purchase much of the inventory it needs to make its laptops, tablets and other devices, Lenovo is evaluating use of a third-party broker, original design manufacturer or other counterparts, according to the company’s Deputy Group Treasurer, Joseph Chua.
By doing so, Lenovo is not only able to realise a JIC approach – dubbed “buy ahead” by the company’s treasury team – the company could reduce its on-balance-sheet inventory, as well as lengthening its DPO. The company’s broker pays for this inventory using standard payment terms, and then invoices Lenovo on payment terms, which can be mutually agreed. Many other sectors could benefit from such arrangements, noted Wang, especially industrial manufacturing businesses, and builders of fast-moving consumer goods (FMCG).
Deploy or preserve?
Despite market uncertainty, growth opportunities do exist, especially in the industrial manufacturing and FMCG sectors. Moreover, while growth in the coming few years is tipped to be uneven globally, overall worldwide GDP will nonetheless grow by 3.6 per cent in both 2022 and 2023, according to the International Monetary Fundiii. This in turn poses a dilemma for treasurers: do they deploy capital to fuel company growth, or preserve capital to shield the business against future volatility?
The webinar poll showed that 68 per cent of delegates favoured for capital to be deployed.
For Lenovo, a balance must be struck. Chua explained that as a major player in the devices market, the company must continue to invest in areas of research and development, otherwise it risks losing ground to competitors. Currently, Lenovo is the world’s largest PC maker, capturing almost 25 per cent market share of the global PC industryiv.
Chua also acknowledged that investing in growth activities could hamper the ability of the company to expand, should a recession or other black swan events strike. Sales would lessen, liquidity would tighten, and overall profitability would fall. Wang similarly attested, “Tread with care, but stay focused on your goals. Don’t let fear paralyse you from actions and be stuck in analysis.”
Digitalisation and data-driven insights
While greater collaboration and integration between different arms of the business and various vendors will collectively improve working capital within the likes of Lenovo, banks too have a crucial role to play in the process. According to Wang, business expectations on the role of banks have evolved, from merely providing credit to businesses, to advising them on how to grow and manage industry-specific risks. At the same time, banks are in a strong position to help businesses build a fit-for-purpose, real-time digital treasury operation – through application interfaces (APIs) and other cutting-edge solutions, payments and receivables can be made instantly, and cash positions accessed anytime, anywhere.
According to Jia Yu Liao, Global Head of Working Capital at Standard Chartered, banks can harness digitalisation to bring enhanced visibility into clients’ working capital strategies, and promote agility for the treasury teams. For example, Standard Chartered’s upcoming working capital advisory tool will enable the Bank’s sales team to harness data-driven insights for clients, by benchmarking their working capital levers against their peers. This advisory approach seeks to enrich optimisation of trapped liquidity through the provision of timely insights, industry best practices, and scenario-planning reports that show the working capital impact of various events on the supply chain.
Building a prosperous and sustainable treasury
Sustainable and inclusive growth typically requires changes to the way companies conduct business – be it procurement strategies, or the types of investments they make in technology and process automation. Panellists shared how ESG goals are impacting their approach to working capital management, in terms of access, efficiency and deployment. Treasurers can influence decisions on sustainable sourcing, and where they locate factories and offices that could be powered by solar energy, for instance, while being fitted with state-of-the-art energy-efficient features and machinery.
Such choices can have a positive effect on treasury and working capital, Chua attested. Over time, these items can deliver cost-savings, while simultaneously reducing the company’s carbon footprint. They also enable the likes of Lenovo to access cheaper capital through the equity and debt markets, with the issuance of green bonds or ESG bonds, among others.
A multi-faceted strategy to optimising working capital is hence particularly relevant to today’s treasurers in ASEAN and beyond. “An effective working capital optimisation plan helps ease today’s short-term liquidity pressures,” reinforced Liao. “At the same time, it puts companies in a better position to grow sustainably once a full recovery returns. This allows them to fund long-term goals and objectives that benefit their suppliers, customers, their own businesses, as well as the environment and society.”
i https://www.pwc.com/gx/en/services/deals/business-recovery-restructuring/working-capital-study.html
ii https://www.pwc.co.uk/business-restructuring/pdf/working-capital-report.pdf