Amer Matar, Director of Global Supply Chain Finance on why access to working capital is important – especially for internationally trading companies with growth ambitions during times of economic stress:
“It is widely accepted that cash is the oxygen organisations rely on for their success and survival, especially through turbulent times. Events such as Covid-19, Brexit and the upcoming U.S. presidential elections create stifling uncertainty. As such, it’s crucial that treasurers and financial managers ensure their cash management is optimised, and this process begins with working capital which is generally the cheapest source of cash for many businesses.
The main influence on the cost of capital is interest rates and treasurers need to ensure they diversify and blend their funding sources, whilst at the same time not incurring a heavy debt load on their balance sheet. Supply chain finance offers companies an attractive avenue to free up cash, pay down debt and increase days payable outstanding.
According to PwC’s Annual Global Working Capital Study 2019/2010:
While revenues are up 10% on last year, this year we’ve seen Operating Cashflows (OCF) decline as a proportion of sales. Companies are continuing to face operational challenges in converting revenue to cash. We are also seeing that CAPEX (as a percentage of revenues) has continued to decline, which suggests that companies are forced to manage working capital by limiting investment.
Companies have finally started to achieve significant improvements in both Days Sales Outstanding (DSO) and Days Inventory Outstanding (DIO). This has been much needed considering the downward pressure on Days Payable Outstanding (DPO). DSO has shown its first improvement in five years as companies have begun to leverage the asset side of the balance sheet.
For the second successive year we have seen a decrease in DPO, underlining that the use of DPO as a quick fix is no longer a sustainable working capital management strategy.
Whilst we have seen improvements in Earnings Before Interest & Taxes (EBIT) margins, some of the value created has been offset by stalling working capital performance, restraining reinvestment and therefore restraining Return on Capital Invested (ROCI). PwC estimates that if companies can ease their access to working capital, it would lift overall ROIC by up to 30 basis points.
In summary, it is crucial that treasurers and financial managers diversify their funding sources and gain access to working capital, without substantially increasing balance sheet debt.”