Funding & Investing

Working capital – treasury leading the charge?

Published: Nov 2019

As corporate treasury continues to operate in a world of concerted change, we find out in the final article in the Citi Treasury Dialogues series, how working capital and funding efficiency have never been more important. From the ongoing trade tensions and shifts in established trading blocks to digital disruption and the ever-evolving tax landscape – driving an efficient balance sheet through effective working capital is key.

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Sophie Yang, Regional Treasurer Asia Pacific, Henkel

Sophie Yang

Regional Treasurer Asia Pacific

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Anahita Shah, Senior Advisor, Treasury Advisory Group – APAC Treasury & Trade Solutions, Citi

Anahita Shah

Senior Advisor, Treasury Advisory Group – APAC Treasury & Trade Solutions

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Watch infographic video Watch interviewView the whole series

Citi has analysed public financial data from over 250 corporates with its key client base in APAC (ex-Japan), representing a cumulative turnover of almost US$3.4trn between 2013 and 2018. The study revealed a growth in the overall net working capital during this period, with deterioration in the weighted average cash conversion cycle (CCC) which went from 53.1 days to 55.8 days.

This is partly attributable to a consistent deterioration in days sales outstanding (DSO) which grew from 56.3 days to 65 days over the same period, as against days payables outstanding (DPO) which improved from 51 days to 61.8 days.

As part of Citi’s analysis, the CCC drivers were also evaluated by industry sector for a subset of its global key corporate client base. The wide variations in CCC drivers of corporates from within each industry sector underscored the scope for tighter management of working capital, with a view to improve free cash flows and optimise the use of enterprise capital to fund business growth and/or transformation. For some corporates, it is treasury that is at the forefront in leading the charge on working capital efficiency.

To take an example, Henkel, a global leader in Adhesive Technologies, and holding leading positions in many markets and categories of its Laundry & Home Care and Beauty Care businesses around the world, has a strategic focus on sustainable and profitable growth in 2020 and beyond. The company has a strong emphasis on efficient balance sheet management, with a view to maximise free cash flows to fund growth. The pursuit of this strategy has necessitated greater working capital discipline, with Henkel’s treasury team closely monitoring Net Working Capital1 and other working capital metrics, whilst actively working on initiatives to help release trapped cash in the cash conversion cycle.

Whilst Henkel’s treasury team is engaged on working capital to support business growth priorities, it also needs to monitor the ongoing geopolitical uncertainties on account of global trade tensions, as these have the potential to impact cash flows and working capital requirements.

As it seeks to further sharpen working capital funding decisions, one of the central challenges confronting Henkel’s treasury team is the accuracy of cash flow forecasts. The principal source of the cash forecasting conundrum is accounts receivables, owing to the lack of predictability around customer payment behaviour.

Considering treasury’s efforts to improve the DPO, expanding Henkel’s existing supplier finance programmes by on-boarding more suppliers is one of the key focuses of the purchasing team. Furthermore, whereas the goal is to drive efficiencies on DSO, established modes of payment can present a significant challenge to treasury. For instance, the usage of bank acceptance drafts (BAD) in China, or paper cheques in countries like Thailand and Singapore, lengthen the time taken to convert receivables to cash.

To address these challenges, Henkel’s treasury team works in close collaboration with its business teams and with its banking partner. Monthly ‘supplier finance days’ are organised within China, bringing together the purchasing team, suppliers and the bank. These provide a platform to acquaint suppliers with the associated financing programmes and address any concerns. Treasury is also working with its banking partners to collate data towards identifying opportunities to extend supplier financing to additional markets within Asia and expand the scope of these programmes to cover cross-border suppliers.

In parallel, Henkel’s treasury is also focused on opportunities to digitise collections with a view to accelerate DSO, and has initiated a pilot that uses QR codes for instant collections in Singapore to replace paper cheque collections from a select group of customers. The pilot in Singapore is a first step towards replicating similar efforts across Asia. In its effort to streamline the use of BADs in China, treasury has published a policy specifying the eligible draft collections and regulating the end-to-end process.

Focused working capital initiatives have contributed to marked improvements in Henkel’s Net Working Capital ratio. Moreover, the automation of cash application and collections reconciliation processes, through the adoption of QR code-based instant collections, is expected to result in operational efficiency gains and an enhanced customer experience.

Henkel’s example highlights the strategic importance of treasury’s role in working capital management. It demonstrates that where treasury is fully aligned with business teams (in particular procurement and sales), it will be much more effective in supporting and influencing decisions with positive implications on working capital. At Henkel, working capital metrics are embedded into the goals of the relevant business stakeholders, driving alignment and focus across the organisation. In this age of digital transformation, another significant takeaway is the partnership approach adopted by treasury in working with banks, to drive working capital improvement through data analytics and advisory.

  1. Net Working Capital = Accounts Receivable + Inventory – Accounts Payable.


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