Optimising working capital in the new normal
A noteworthy fallout from the COVID-19 pandemic has been supply-demand imbalances that have impacted all areas of the global economy.
On one hand, demand for staple items such as food and health and hygiene products has soared1, while supply chains continue to be disrupted2. Equally, demand for electronic products like laptops and the raw materials needed to make them has surged3, as work-from-home continues for many businesses4. On the other hand, in some industries such as construction, transportation and real estate5, supply has outstripped demand.
These shifts are having a profound effect on the working capital strategies of treasurers from a multitude of industries. Some have found themselves aflush with cash, yet others have been severely challenged in terms of cash flow. Moody’s Investors Service warns that these imbalances could negatively impact the global recovery6.
At the recent Treasury Leadership Forum 2021 organised by Standard Chartered, leading treasurers provided insights on how best to optimise working capital while fulfilling obligations to suppliers and customers alike.
‘Just-in-time’ versus ‘just-in-case’
Manufacturers with inventory typically deploy one of two working capital strategies: just-in-time (JIT) inventory management, or just-in-case (JIC) inventory management. Most prefer the former where materials arrive just as production begins. Often, the cost of storage is high, goods may be in high demand, and/or the manufacturer can rely on a steady supply of materials. In contrast, manufacturers that are prone to supply disruption or materials price volatility tend towards JIC.
Surging demand for consumer electronics means that for smartphone and internet of things accessories maker OPPO, the JIT approach is the preferred option, according to Cassidy Cheng, Financial Director for OPPO Indonesia. Unfortunately, today’s shortage of semiconductors7, a necessary component in most electronic devices, means there is a risk that orders can’t be fulfilled. The company has therefore had to strike a balance between the two strategies.
According to Ashok Jain, Head of Corporate Finance at Thai chemicals company Indorama Ventures, the materials sector typically operates with JIC. However, with working capital pressures, many are switching. By doing so, Indorama reduced its cash cycle by 10 days, resulting in savings of up to USD400 million in the company’s cash flow, as well as significantly lower interest payments8.
Services and technology firms do not normally hold inventory, so companies like Microsoft don’t face the same working capital challenges. Nonetheless, these businesses can still support manufacturing and materials companies, by leveraging their own balance sheets from a receivables financing perspective, explains the company’s Regional Treasury Manager, Mukesh Singh. Suppliers of physical items such as office equipment can also gain from supply chain financing.
Michael Sugirin, Global Head, Open Account – Trade Product Management, Transaction Banking at Standard Chartered, highlighted that going forward, companies should focus less on JIT or JIC, and instead choose tools that can help optimise their working capital needs. The increased pace of digitalisation, greater access to data, and more oversight of receivables and payables are critical, he says. “Looking at our own data, we’re able to better advise clients on their working capital needs.”
‘Win-win’ solutions
As supply-demand imbalances readjust, business practices must adapt. To ease this transition, says Microsoft’s Singh, businesses should liaise with their customers and suppliers, and offer financial support if possible. Not only will this boost customer loyalty, it might also lead to better pricing from suppliers. Successful businesses could also amend their capital structure, by reducing their corporate debt, for example, to maximise profitability and enable future growth.
Cheng and his team at OPPO believe that the experience use of order processing automation and virtual accounts can help to further bolster working capital. These tools act like credit cards, allowing customers to automatically place orders within pre-set buying limits, granting both buyers and sellers large cost and workflow efficiencies.
Indorama Ventures’ Jain encourages treasurers to seek out credit risk insurance, in addition to supplier and receivables programmes. Such insurance can safeguard shipments to new markets and new customers where counterparty risk is higher.
Companies should also consider referring customers and suppliers to their banking partner, says Manoj Saxena, Head of Finance, Accounts and Treasury at Malaysian medical fabrics manufacturer Recron. Banks like Standard Chartered will not only have insight into the company’s cash flow, they will also likely be able to support buyers and suppliers with financing facilities that are a ‘win-win’ for all.
Building long-lasting partnerships
The most significant opportunity for treasurers is to connect their businesses, whether local or global, with suppliers and customers through a single portal. That way, companies obtain a 360-degree overview of their business, across payables and receivables, and other cash and liquidity management facilities.
“As companies increasingly move to the cloud and into a space where everyone is connected digitally, there’s an opportunity to connect the entire supply chain through a single platform,” says Sugirin. “Business interconnectivity was part of a big trend that began unfolding before the pandemic, and which has since rapidly accelerated. As a bank committed to building more intuitive, sustainable and resilient supply chains over the longer term, Standard Chartered is a banking partner that is truly here for good.”
1 https://www.cnbc.com/2021/10/18/supply-chain-chaos-is-hitting-global-growth-and-could-get-worse.html
3 https://www.sciencedirect.com/science/article/pii/S266678432030005X
5 https://www.straitstimes.com/singapore/slump-and-recovery-the-two-faces-of-singapores-economy
7 https://www.bloomberg.com/graphics/2021-semiconductors-chips-shortage/?sref=d8oB8qmA
8 Ashok Jain, Head of Corporate Finance, Indorama Ventures Limited