As inflation and recession batter corporates, Alistair Baxter, Head of Receivables Finance at Taulia has key advice for treasury departments.
In the UK the CPI measure of inflation has hit 10.1%, the highest level since February 1982 meaning the Bank of England is likely to keep on its strict path of rate rises. While all advanced economies have seen a rise in inflation, it has been stronger in the UK than in other G7 countries and most European nations. As more rate hikes risk pushing the UK economy into recession, corporate treasury departments are bracing for pressure on margins, cash and working capital.
Not all forms of inflation were born equal
Post-pandemic return of consumer demand was always going to trigger a temporary rise in inflation, with more consumer dollars chasing a depleted supply of goods as supply chains began to restart. However, when combined with additional supply chain restrictions and the soaring costs of oil and gas due to the Ukraine War, short-lived demand-driven inflation has been dwarfed by cost-driven inflation and the structural reform that comes with it.
Not only is the level of inflation a concern, but so too is the speed at which it arrived, which means that central banks are playing a game of catch-up. However, the monetary medicine they are offering up will only tackle one of the two inflationary pressures.
Can interest rates tame inflation?
At a macro level, interest rates and other monetary policy instruments do a great job of stabilising the economy; however, they are fairly crude instruments and, for the most part, act in a non-discriminatory way. The reality for many businesses, especially small and mid-sized ones, is that when the cheap debt they feasted on over the past few years comes to maturity, they face much higher interest costs. The Federal Funds Rate, Bank of England Base rate, and similar reference rates are only partly to blame – credit margins have been pushed out at the fastest rate since 2008, so treasurers have a larger interest cost headache to deal with. This puts pressure on margins, cash, and working capital.
Supply chains are being surgically redesigned
Supply chains were already under scrutiny pre-pandemic, but the heightened focus following shortages in containers, silicon chips, wheat, and now Dijon mustard, has brought a reckoning to the management of supply chains and the financial flows that support them. No longer is financial efficiency de rigueur: security of supply and just-in-case inventory management are the words on leaders’ lips. This distancing from efficiency brings numerous benefits to the end customer, but it also has treasurers searching for ways to generate working capital velocity to make up for reduced margins. By focussing capital at key points in the supply chain, treasurers can create ESG incentives, embolden key suppliers and create a more efficient capital model to survive and even thrive in the current economic climate.
Recession is a promise not a threat
Last month, commodity prices dipped as speculators feared a slowdown in demand. We’re now seeing this slowdown come through in some economic measures, suggesting that a recession is all but inevitable. What is clear is that this recession will be a very different beast to the one in 2008. The financial crisis was a flash flood with a clearly identified source. This time around, multiple sectors and industries are facing unique challenges stemming from a structural change in demand, supply chains, and inflation. This leaves businesses facing the decision to either weather the storm or find growth and outpace inflation. This is where working capital management has a crucial role to play.
