17 June 2016

Beyond Growth: The Benefits of Implementing a Working Capital 2.0 Strategy

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In today's post financial crisis world, companies that adapt their working capital strategies to the new conditions of economic growth can benefit from more robust supply and distributor chains. Beyond this, however, there are also a number of additional benefits to adopting an updated strategy that can have enterprise wide implications.

Although the IMF is predicting global growth to hit 3.4 per cent in 2016 - up from 3.1 per cent in 20151 - one of the ironies of this gradual return of economic growth is that it can cause businesses to fail. Rising demand in supply and distributor chains can outstrip the working capital resources of smaller entities. Even if these smaller entities manage to survive, their performance is likely to deteriorate, with their trading partners suffering the consequences of supply and sales disruption.

Fortunately, this scenario can be avoided if larger participants in the commercial ecosystem adapt their working capital strategies to introduce new external sources of working capital, such as receivables financing, forfaiting, reverse factoring or supply chain financing. Furthermore, in addition to distributor and supply chain resilience, this approach delivers a number of other valuable business benefits.

Enhanced business information

The preparation for working capital financing initiatives provides a range of operational efficiencies both within and beyond treasury, which in turn can enhance margins by reducing frictional process costs. For instance, while the adoption of a cash conversion cycle Defined here as DIO (days inventory outstanding) + DSO - DPO enables companies and its suppliers and buyers to grow together - it can also help to drive a tune up of accounts receivable and accounts payable processes. However, the introduction of additional working capital to the commercial ecosystem also generates supplementary business information. As an example, if a supply chain financing scheme is established, data on which suppliers are using the scheme and how they are using it can provide useful insights into their capacity and activity.

Gathering and analysing this sort of data is now common practice among leading global corporations. They will be monitoring not only their own working capital extremely closely, but also that of their supply chain partners in order to ensure that their commercial ecosystem remains healthy. This ultimately translates into higher margins and profits since they can continue selling with confidence in the knowledge that shelves will be restocked by a robust supply chain.

Increased goodwill and performance

With the growth environment now gradually re-emerging, a number of large corporations will be finding out just how strong their relationships with distributors and suppliers really are. Perhaps unsurprisingly, those who have squeezed their suppliers and distributors will find themselves given lower priority than those that have previously been supportive. Extrapolate this behaviour throughout an entire commercial ecosystem and those that have put pressure on suppliers and distributors in the past may find their supply and sales continuity jeopardised just when they are needed to support growing demand.

In today's post financial crisis world, companies that adapt their working capital strategies to the new conditions of economic growth can benefit from more robust supply and distributor chains. Beyond this, however, there are also a number of additional benefits to adopting an updated strategy that can have enterprise wide implications.

By contrast, those organisations that supported their trading partners with an enlightened working capital strategy are not only likely to be given priority, but they will also be in a strong position to obtain better performance from those partners. For instance, in some production processes it is simply not possible to store more than a limited amount of raw material inventory. If suppliers benefit from additional working capital, then some of that can be invested in enhanced logistics to improve delivery performance.

Heightened innovation and perceptions of treasury

This can be taken a step further to encompass product design (and already has been in certain industries). Suppliers supported by sufficient working capital have the ability to invest in the customer relationship in areas such as innovation. Rather than the conversation revolving principally around price and delivery performance, it extends to the supplier also adding value through product development and enhancement. Under these circumstances, working capital management moves beyond being primarily concerned with financial risk to potentially deliver business optimisation benefits as well.

This has important implications for how the treasury function comes to be perceived within the organisation. For some years now there has been a move towards treasury becoming more closely involved in business development and planning. What better way for treasury to justify its place at those discussions than by giving the organisation a measurable business advantage through its working capital strategy?

Conclusion

This is just one reason why Working Capital 2.0 is about more than just working capital in the traditional sense. Steps initially taken to reinforce supplier and distributor chains through the provision of increased working capital generate a range of additional advantages: enriched business information, supplier and distributor goodwill, enhanced supply and distribution performance, and new research and development resources.

Nevertheless, the fundamental first step is to deliver working capital to where it is most needed using the most appropriate instrument. That is considerably easier to achieve when working with a banking partner that deals daily with thousands of supplier and distributor chains globally in multiple industries and which can also deliver both insight and an extensive working capital toolbox from which to choose.

  1. http://www.imf.org/external/pubs/ft/weo/2016/update/01/
  2. Defined here as DIO (days inventory outstanding) + DSO - DPO

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