Cash & Liquidity Management

Are you receiving me? Exploring the ‘dark side’ of the balance sheet

Published: Sep 2019

Dark night sky with only a little light part of the moon

Companies are increasingly finding alternative ways to improve their working capital.

John Murray, EMEA Industrials Sales Head, Treasury and Trade Solutions, Citi

John Murray

EMEA Industrials Sales Head, Treasury and Trade Solutions, Citi

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Today, challenges such as geopolitics, cybercrime and regulation vie for attention with opportunities offered by innovation, collaboration and optimisation. These are interesting times and every business has to find a careful balance because, regardless of sector or specialism, they share one common goal: to survive and thrive.

A big part of the challenge is keeping working capital metrics healthy, says John Murray, EMEA Industrials Sales Head, Treasury and Trade Solutions, Citi. “Analysts often report on the success of balance sheet management, assessing whether a business can deliver the returns that it promises to the market.”

Murray notes that companies in the industrials sector are increasingly looking to alternative sources of financing as they manage their balance sheets and generate free cash flow.

At Citi the industrials sector covers six sub-sectors ranging from automotive and airlines through to shipping and logistics. It therefore presents a diverse set of needs and challenges. Automotive, for example, has to respond to the drive for electrification, digital connectivity and in-car payments as well as changing business models of ownership and use. Meanwhile, shipping and logistics companies are having to manage greener fleets and greater digitisation. In each case, delivering on expected returns is vital.

Meeting the challenge

Sustainability and efficiency issues are being tackled by all sectors with “every company focused on improving shareholder return,” Murray reports.

Traditionally, companies have used supply chain finance and B2B card solutions to improve their working capital and free cash flow. This gives access to different streams of liquidity and improves quarter and year-end working capital for the buyer and seller, says Murray.

With digitisation and disruption driving change, Citi is enhancing its value proposition to give immediate benefits to buyers and suppliers. Today Citi’s corporate card programme is used by buyers to pay suppliers earlier. This protects their working capital flow whilst extending buyer days purchasing outstanding (DPO) and reducing supplier days sales outstanding (DSO). Today, Citi is working with a fintech to extend the solution and allow companies to pay their suppliers who do not accept card payments within the card programme.

Rise of receivables

To be truly effective, both sides of the balance sheet need to be considered, as treasurers look for diversified sources of financing and sales teams seek new ways to unlock revenue growth.

Treasurers are now looking for ways to further improve their metrics and are using their receivables to do so. Increasingly, they are considering sales financing and distribution finance programmes that harness the power of receivables not only to improve working capital but to provide strong sales incentives to customers.

So-called ‘sales finance’ uses traditional receivables financing structures in a more sophisticated way, allowing companies to offer selected customers and distributors extended payment terms in exchange for increased business. The financing programme mitigates the impact of the extended term and results in better working capital for both buyer and seller – a ‘win-win’ scenario.

“In the last 12 months there has been a surge of interest from our industrials sector clients to explore alternative financing solutions that tap into the receivables side of the balance sheet and drive sales growth,” says Murray.

For example, companies in the paper and packaging and chemicals sectors are aiming to improve their buyers’ purchasing power to increase sales volumes and are implementing these solutions to improve and maximise their returns.

Emirates Global Aluminium’s recent Highly Commended Working Capital Management award in the Treasury Today Adam Smith Awards, was in recognition of its off-balance sheet funding solution.

This was based on a bespoke Citi receivables purchasing programme which is helping to accelerate free cash flow and ultimately improve return on invested capital (ROIC). The company achieved this through maximising liquidity from a portfolio of its clients, both large and small.

Murray notes that many industrial companies have sought to meet quarter and year end working capital targets through the sale of their receivables whilst achieving off-balance sheet treatment under International Financial Reporting Standards (IFRS). “One client with a diversified customer base recently completed a Distribution Finance Programme to optimise their working capital each quarter and release excess cash.”

Regardless of whether global sales, procurement, credit, treasury or another function instigates a receivables financing programme, Murray believes that it is essential for all parts of the business to be aligned with the ultimate goal of delivering expected returns.

“Clients are working with us and exploring these alternative solutions to optimise their balance sheets,” he continues. “With solutions on the receivables side of the balance sheet refined and modernised for today’s needs we provide detailed support and analysis of each client’s unique frame of reference before providing the solution, whether that is for one customer or for a portfolio of hundreds.”

When it comes to healthy working capital metrics, treasury is well-placed to discover alternative sources of finance. With payables solutions typically well met, depending on the mix of receivables in any given market, the treasurer can also now play a decisive role in exploring the other side of the balance sheet.

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