Cash & Liquidity ManagementCash ManagementWorking capital: An important tool in uncertain times

Working capital: An important tool in uncertain times

In uncertain times, the importance of working capital climbs, as we find out.

It’s seemingly impossible to avoid talk of uncertainty at the moment. If it’s not the ongoing saga and chaos of Brexit, there’s talk of recession, trade wars, tightening of liquidity in markets and volatile foreign exchange. While nobody can predict what’s going to happen with all of these, the one thing we can say is that working capital is now as important as it has ever been – if not more so.

There’s no escaping the fact that cash is the lifeblood of any company. It’s more important than ever for businesses to optimise this fundamental aspect of financial performance if they’re to maintain a steady course in these uncertain times. Given that working capital is the cheapest source of cash, nothing is more vital than having a cash culture and good liquidity on board. Stringent management of a company’s working capital has become a critical instrument of corporate strategy.

Working capital is one of the few remaining areas that can deliver significant cash to the business in a relatively short time, without the pain that comes with large change or restructuring programs – and this is perhaps one of the reasons why the likes of Citi are seeing demand for products that drive availability of working capital.

“The products that promote working capital for our clients are going to grow because clients are extremely focused on working capital right now,” explains Natasha Condon, Head of Trade Sales Europe, Treasury and Trade Solutions, Citi. “That’s what’s driving conversations.

We’re in a macroeconomic environment which is uncertain, so organisations are thinking about how they can futureproof themselves

“We’re in a macroeconomic environment which is uncertain, so organisations are thinking about how they can futureproof themselves. That means building up a working capital buffer so that they can deal with shocks and nasty surprises. People are paying more attention to their credit control and risks in their supply chain than they perhaps haven’t had to for a while.

“To me, the products that provide solutions to those problems and provide working capital will be the focus. LCs for example, are a way to mitigate risk in emerging markets.”

Cash acceleration

Peader Mac Canna, EMEA Co-Head Trade Finance, Treasury and Trade Solutions at Citi also told us that cash acceleration in terms of receivables and payables may come into play. Then there are contingent instruments whether they’re unconditional or conditional guarantees, commercial LCs or whatever.

“The working capital space is immense for Citi,” said Mac Canna. “The disruption that companies are facing is potentially large, and the capital and flexibility that they need to respond very quickly to disruptive events and inorganic opportunities such as purchases, is driving more working capital optimisation. The macroeconomic events are well documented and then there are regulatory environments, whether it’s around accounting policies around revenue recognition or lease accounting.

“The world is always volatile, but where we are in terms of overall leverage, when you think of quantitative easing, tapering, liquidity coming out of the market, credit spreads starting to tick up and so on, I think we’ll continue to see spreads widening for the non-investment grade sector.”


Interestingly, a recent working capital study by PwC suggests that working capital is only going to become more important as 2019 progresses.

Looking at the journey ahead, the signs are that more cash will be needed – and with monetary policies tightening globally, the costs of failing to chart the right route are set to increase, the foreword to PwC’s annual global Working Capital Study said.

The report went on to add that if all the companies in the study were to improve their working capital efficiency to the level of the next performance quartile, this would represent a cash release of €1.3tr. This would be enough for global companies to boost their capital investment by 55% – without needing to access additional funding or put their cash flows under pressure.

PwC suggests there are three reasons why working capital should be high on the corporate treasury agenda:

  1. Converting cash is becoming harder: While revenues are up by 10% on last year, this year we’ve seen a decline in companies’ ability to turn higher revenue into cash.
  2. Capital expenditure is continuing to decline: Capital expenditure (capex) as a percentage of revenues has plummeted during the last five years, suggesting that companies are managing cash flows by cutting investment. In the long run, this will leave companies under-invested, posing a threat to their growth. By optimising working capital, global companies can release the funds needed for continued investment without squeezing their cash flows.
  3. The cost of cash is increasing: During the recent sustained period of cheap borrowing, the cost of cash may not have presented cause for concern. However, given the current outlook of fiscal tightening and uncertainty around global trade, now is the time for companies to shore up their balance sheets to be ready for all eventualities.

Addressing the working capital problem

To help treasurers and CFOs understand how to improve liquidity not just across their own business, but across their supply chain as well, the Working Capital Summit was set up last year. At the inaugural event, Telstra’s George Papanikolopoulos discussed how the telco giant is using working capital to make itself match-fit to meet the challenges of tomorrow. It is doing this by unlocking capital trapped in its supply chain to finance investments in essential technologies such as 5G.

Crucially, Papanikolopoulos highlighted how the company’s efforts to improve cash liquidity are not coming at the expense of suppliers – by putting an early payment programme in place, for example – but rather in a way that suits their own individual business needs.

This highlighted why there’s an opportunity for people in treasury to understand that cash isn’t just something you need to mitigate risk around, it can be a strategic asset that can be unlocked for a business, which can fuel the business transformation that companies need. That’s something we’ll address in a future article on The Global Treasurer.

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