Why working capital can be a treasurer’s friend

Supply chain finance and dynamic discounting

Liquidity throughout a buyer’s full supply chain is paramount in today’s economic environment. Buyers can demonstrate commitment to the relationship by sponsoring a supply chain finance program, which leverages buyer risk. Suppliers who see their cost of capital higher than the buyer’s cost can use the program to sell their receivables at a discount and receive payment earlier from the supply chain finance provider.

On the other hand, if a buyer is in a cash-rich position— and can pay invoices early— it’s possible to receive a financial return with dynamic discounting. Buyers should look to work with a bank that can offer both supply chain finance and dynamic discounting solutions on one platform.

 

Inventory management

The COVID-19 pandemic demonstrated how disruptive events, such as supply chain challenges, affect the just-in-time inventory management method. As a result, more organizations are now shifting to the just-in-case inventory method, or sourcing required inputs from suppliers nearby.

Inventory drains capital and uses ample balance sheet capacity. Corporates should actively engage with banks to see how their assets can be better managed, or managed on an off-balance sheet basis. Banks can help create structures that improve inventory management and optimize associated costs without interrupting current supply chain arrangements.

 

Selling account receivables

Corporates should try to always have a facility in place to sell a pool of account receivables to a bank at a discount for three reasons:

  1. Increase variables sales
  2. Accelerate the collections of receivables
  3. Create an additional liquidity source

If the bank’s discount for the receivables is lower than the corporate’s weighted average cost of capital, the corporate can benefit from discounting the receivables on an off-balance sheet and true sales basis. 

Additionally, an account receivables financing program can help grow sales internationally and locally as any excessive exposures to corporate and sovereign buyers can be transferred to the bank by selling the receivables. As such, corporates could actively manage the days sales outstanding metric, allowing banks to be creative with receivables financing structures.

 

Risk mitigation

Without proper risk mitigation tools, corporates could face lost sales and credit write-downs and be subjected to economic uncertainties.

Many countries manage their currency according to the U.S. dollar since it’s the most frequently used currency in global trade. As a result, monetary policy changes that benefit the U.S. economy don’t always benefit countries in emerging markets.

With a tightening monetary policy, liquidity can become scarce because of capital outflows. Importers are, therefore, unable to raise funds for purchases, which can result in lost sales for sellers from the Organisation for Economic Co-operation and Development (OECD) countries.

A commercial letter of credit payable at sight can help increase sales and mitigate risks for the buyer. In a high-interest rate country, the seller can help raise a required U.S. dollar amount for purchases. Proposed by the seller, this could give the buyer access to the seller’s capital markets and arrange longer payment terms, which could help the seller when negotiating commercial contract terms and conditions.