Cash is undeniably the lifeblood that enables organizations to weather the uncertain political and economic conditions currently battering businesses across the globe. For the last decade, low interest rates have made it relatively easy for companies to source liquidity, but things are changing. Corporate debt levels are skyrocketing while cash-to-debt ratios for corporate borrowers are plummeting. It’s crucial treasurers and financial leaders optimise their organizational cash culture in 2019 – and because it’s typically the cheapest source of cash for many businesses, that journey towards optimisation needs to begin with working capital.
According to PwC’s Annual Global Working Capital Study, the capital performance of large organizations has been relatively static in recent years. Yet as monetary policies shift, and markets continue to evolve, firms hoping to leap forward in 2020 must improve their working capital efficiency now. PwC’s study found that if all firms were to increase their working capital efficiency to the level of the next performance quartile, it would facilitate a collective cash release of €1.3 trillion – subsequently boosting capital investment by 55% without placing any additional pressures on cash flows.
Bearing that outlook in mind, it only makes sense that businesses should now be placing strategic emphasis on improving working capital in 2019. Yet it’s also worth pointing out there are a few key challenges financial leaders will need to prepare for in order to bolster their working capital and enhance liquidity in the months to come.
The cost of debt is increasing
First and foremost, debt is getting more expensive. After more than a decade of rock-bottom interest rates, the US Federal Reserve has finally started to tighten its monetary policy and allow borrowing rates to climb. The Bank of England and Bank of Canada followed suit last year, and a departure from the European Central Bank’s negative interest rates policy is anticipated to occur in mid-2020.
Yet because interest rates influence the cost of capital so dramatically, it’s incumbent upon financial leaders to diversify their organizational funding sources in order to track down working capital without incurring huge debt on their balance sheets at the same time.
Supply chain finance, or reverse factoring, is rapidly emerging to be one of the most attractive ways for companies to free up cash and drive efficiencies while simultaneously paying down debt and driving up days payable outstanding (DPO). This allows companies to tap into working capital previously trapped in their supply chains to fund strategic initiatives such as digital transformation, acquisition activity and the build-out of new infrastructure. It’s no wonder demand for supply chain finance has spiked dramatically in recent years. Fortunately, there are a range of innovative and low-cost cloud-based supply chain finance providers like market leader PrimeRevenue that offer plenty of viable models and solutions.
Global trade faces uncertain times
Business is all about certainty – and right now, markets across the globe are totally engulfed in a perfect storm of socio-political change that’s generating a whole lot of uncertainty across virtually every single industry space. From the imminent restructuring of NAFTA, to the ratification of the CPTPP and the yet-to-be-defined future relationship between the UK and Europe, global trade will be on par for monumental change in the months to come.
That change inevitably impacts supplier bases for the worse across a variety of sectors.
“Businesses across the globe are feeling the pinch of America’s trade war with China and protectionist industry-specific tariffs in Europe”
Likewise, businesses across the globe are feeling the pinch of America’s trade war with China and protectionist industry-specific tariffs in Europe. Large companies in particular industries and markets have already been forced to rationalize their supplier bases as a result of these tariffs and shift manufacturing or personnel overseas – driving up costs and complicating formerly tried-and-tested supply chains.
In order to insulate from the associated costs of these ever-increasing socio-political threats and continue to deliver on their strategic goals, firms have got to find a way to free up working capital in 2019.
Logistics is getting costly and complicated
The uncertain face of global trade has made procurement trickier, too.
According to logistics provider Averitt’s 2019 State Of The North American Supply Chain Survey, 41% of shippers said tariffs were now negatively impacting their business – with 32% experiencing new problems with customs clearance in 2018. These issues paired with a driver shortage in the US undeniably hit business customers through increased shipping costs, with companies now facing price increases of up to 15%.
These challenging market conditions aren’t going anywhere in 2019, and so mitigating such price hikes will need to be a top priority for procurement teams. Many teams are already working to drive down costs and free up capital by developing more collaborative relationships with key suppliers through joint working capital initiatives and supply chain finance solutions.
“A new breed of AI-powered solutions have empowered organizations to utilize benchmark data like never before”
Likewise, a new breed of AI-powered solutions have empowered organizations to utilize benchmark data like never before in order to make better-informed procurement decisions. That being said, these newfound tools are also pushing financial leaders to answer fundamental questions like never before concerning how this benchmark data can actually be utilized to better source cash and enhance liquidity.
At the end of the day, there’s no textbook power play firms can call upon to navigate these emerging working capital challenges. They’re all dynamic problems that call for similarly dynamic solutions – which is why treasurers and CFOs keen on unlocking their cash flow should dive deeper and explore all options available to them before committing to a strategic way forward.
Tackling Working Capital Challenges in 2019
For lessons on how and why other organizations are strengthening their working capital strategies, financial decision-makers should tune into PrimeRevenue’s “Tackling Working Capital Challenges in 2019” webinar. The webinar features PrimeRevenue CEO PJ Bain and CFO Nathan Feather and explores the state of today’s global climate, alternative solutions to overcome working capital challenges and how companies can capitalise upon opportunities today in order to enter 2020 with a competitive advantage.
The webinar is available on-demand now.