Treasury Today Country Profiles in association with Citi

Fix the roof while the sun is shining

Man wearing yellow gloves, fixing a red roof.

Improvements to working capital became a strong focus for companies back in the credit squeezed aftermath of the financial crisis. But now research seems to indicate that some corporates have taken their eyes off the ball. With the sun soon to set on the era of cheap credit, is now the time for corporates to once again make working capital optimisation a business priority?

European companies now have €762 billion tied up in excess working capital, according to recent research by REL Consultancy.

What is stopping corporates from unlocking all this excess working capital? The results of Treasury Today’s 2013 European Benchmarking Study seems to indicate that corporates are lacking the necessary focus and resolve to make sustainable improvements to their working capital. Of the hundreds of corporate treasury professionals who responded to the survey, 60% said that working capital was not among the top five priorities for their treasury.

Part of the problem could be the sheer abundance of cheap debt available in European markets in recent years. Debt among corporates increased by 6% year-over-year in 2012 and, to some experts, it seems more than coincidental that this growth in debt occurred at the same time working capital performance deteriorated.

“I think historically low interest rates have influenced it in some sense though as it offers an excuse not to have it as a priority,” says Guy Cabeke, Principle at the Hackett-REL Group. “Some companies may think while interest rates are low they will take advantage by borrowing money and don’t have to worry too much about working capital. But, even low costs eventually add up.”

Tougher times ahead

If companies have indeed neglected working capital because of cheap credit, it is a choice they may come to regret in the years ahead.

The era of inexpensive debt is unlikely to last forever. In corporate debt markets, yields are likely to rise when the Federal Reserve begins to unwind its asset purchasing programme. But companies turning away from fixed income capital markets as the cost of debt increases will not be able to count on their banking partners for cheap finance either. As treasury consultant Jack Large explained in a recent blog post, with banks needing to adjust their business models to bring themselves in to compliance with Basel III, we will surely see the cost of funding through bank channels climb sharply. In this type of climate, Large writes, “the need for corporates to optimise their working capital becomes even more important.”

However, too often efforts to optimise working capital fail to secure sustainable improvements. In Cabeke’s opinion this is because time and again working capital initiatives are viewed within the company exclusively as a finance issue. “To really address working capital you have to have a culture driven around working capital,” he says. “That means involving everybody that has an impact on performance, be that people in production, sales or procurement – with the treasury team taking the leading role.”

Sometimes, he adds, treasury teams exhibit a “little shyness” when it comes to the issue of bloated inventories. “Of course, operations might protest that they need a certain amount of inventory. But if the treasury is serious about achieving sustainable improvements to working capital it needs to take a more active role in driving improvements across the different areas of the company.”