The troubled global economy is having a transformative effect on working capital optimisation (WCO) and the financial supply chain, according to a leading expert on cash management.
“In the past year there has been a complete change in the corporate world with regard to how WCO is being used by treasuries,” says John Mardle, Managing Director at CashPerform.
Two developments are driving the shift. First, there is a distinct lack of good investment opportunities as a result of the continuing Eurozone crisis. This has resulted in corporates hoarding record amounts of cash. In late March corporate cash holdings in Europe were estimated to be an enormous €2 trillion. Secondly, the very same corporates are finding their supply chains are running into trouble as small businesses – ie their suppliers – struggle to keep out of the red.
What results is a “trade-off,” argues Mardle. On the one hand, corporates are saving for the proverbial rainy day. But on the other, there are companies that realise that the extra cash can be used to bolster their supply chains.
Often confused with simply releasing trapped cash, working capital optimisation relates to the art of establishing and maintaining an effective supply chain for the business, according to Mardle.
From theory to practice
Recent efforts to hoard cash have in many ways led to the rapid emergence of ‘dynamic discounting’ on this side of the Atlantic. Dynamic discounting occurs when a supplier offers a buyer a discounted payment, often in tranches. With more cash in the company coffers in both the United States and Britain, businesses can afford to pay large sums of money upfront. Take a £10,000 payment for a goods delivery for example. The buyer says it will pay a total of £9,500 for the items – ie implying a 5% discount – but will pay, say, £8,000 upfront; the remainder paid at a later date.
The current market environment is fuelling this development. Suppliers are finding it difficult to make ends meet; an immediate payment can be used to relieve strained cash flows. And with many businesses hoarding cash, buyers are in a better position to offer that payment upfront.
But the emergence of ‘dynamic discounting’ is just one aspect of a ‘new norm’ in WCO. Another is the recent uptake of ‘white labelling’, where a corporate outsources the task of chasing debt to an agency that can operate under that company’s moniker.
“In 2012, WCO best practice is about proper alignment throughout the whole financial supply chain, taking into account the type of sector you are operating in,” says Mardle.
It is no longer enough to view WCO in terms of trade assets and trade liabilities. A two dimensional viewpoint such as this inevitably leads to limitations in the potential of effective working capital management processes.
Instead corporates should adopt a holistic approach to the financial supply chain, says Mardle. Think of the importance of maintaining transparent counterparty relationships. Think of bolstering the supply chain with innovative payment solutions that make both your business and the supplier see the benefits of working together.
With the Eurozone crisis showing no signs of abating anytime soon, cash-rich corporates are faced with a choice: hoard or invest. Holding onto cash certainly increases a company’s flexibility in dealing with ‘stress’ events. But this is a short-term strategy to navigate through stormy waters. A few treasurers are extending their sights further however, and bolstering their supply chains with prudent investment.