Supply Chain Finance

Commentary

Working capital. It comes up regularly in our discussions. Every business hates it: it is expensive – it needs to be funded and managed; accounts receivable and payable teams need to be staffed, while inventory brings warehousing costs and obsolescence risks. But no business can do without it – everyone hates to win a sale, and then find it cannot be fulfilled, due to a lack of inventory or credit appetite for the customer.

The cost of working capital has increased recently: higher interest rates are painful, while just in time supply chains are being called into question, as COVID and geopolitical issues have disrupted logistics. 

This call is the first of several where we look at how treasurers are handling this issue. This session was about the role of treasurers, and the involvement in the business decisions: this is a real test of treasurers’ influence. It was a rich and lively discussion – the full report is 15 pages. I encourage people to read it.

We started with the results of a survey amongst our members.

1. This was not a surprise: participants all felt they had an important contribution to make, but that it was not being fully appreciated or utilised by the business. Involvement was highest in managing payables – it is mostly administrative. It was lowest in inventory management – this is typically under supply chain. Receivables management was between the two.
2. This was not discussed in the call or the poll, but there was no mention of the mathematical models which can be used for the trade-offs between lost sales and financing costs. However, several participants wryly remarked that their businesses accepted longer payment terms for their customers than they received from their suppliers – even when they were the same company. 
3. Several participants benchmark their working capital levels to the competition. This can easily be done using the published annual accounts (but beware of differences in accounting treatment!), while some financial services providers have tools which use anonymised data from their working capital programmes.

The main takeaways: 

• Approaches vary considerably. Some participants have the full support of the CEO and CFO. These companies view working capital as a key component of their balance sheet structure, and have implemented comprehensive programmes to manage it. These include KPIs and programmes implemented with Sales and Procurement. For others, management does not view it as a priority: KPIs either do not exist, or are lesser targets than sales and revenue.
• Management with a high focus on the topic was often new, and did not seem to be driven by financial necessity, but by management principles.
• One participant found that policies....

Commentary

Brazil is a success story. It often does not receive the credit it deserves, because it remains a difficult and complicated place to do business. But all the treasurers involved in this discussion have large and profitable businesses there – there was a time when most people lost money. On the political front, Brazil has recently seen both left and right wing governments, but both have respected election results, and the economy has continued to progress through it all.

Of course, it is not all rosy: though many rules and administrative processes have been relaxed, much complexity remains. In the past, a local treasury presence was required: it is now possible to run the country from offshore, though a specialist team may still be necessary.

The challenges discussed in the call:

• Boletos: many customers in Brazil pay using boletos. These are a form of bill of exchange, where a document is prepared, usually by the seller, with all the payment information, including a barcode. This can then be presented by the payer in any location, and payment will be received by the seller in their bank account. This is a good system, but participants complained vehemently about the cost, and banks’ unwillingness to reduce the fees. Other issues:
• Boletos are often cancelled when they are not paid on time and a new one is issued, instead of charging the intended late payment fees. 
• Payment of a single invoice is often spread over several boletos, each with different due dates: this causes the very accounts receivable reconciliation issues the system is designed to avoid.
• Boletos can be issued electronically (e-boletos): these reduce the amount of paper but, disappointingly, the fee reduction is not significant.
• Some participants regularly do RFPs for this business, and frequently change banks. But fees remain high, and banks are often unwilling to continue.
• Frequent changes in the process and rules present challenges in keeping the systems updated – this often results in manual processing.
• One participant noted an improvement in service and processing efficiency.
• PIX: the good news is that a form of on-line payment, PIX, is available and becoming increasingly popular, even for B2B transactions – and the fees are paid by the payor. The bad news is that the fees are also high, though not as high as for boletos. 
• Tax payments: there is a requirement to maintain accounts with many local banks to make payments to tax authorities around the country. One participant is very happy with a JPMorgan tool to manage this and eliminate the related local accounts. Another used this tool in the past, but is now achieving the same result with Citi.
• FX documentation

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Commentary

This Treasury Peer Call took place a few days after the announcement that India had officially overtaken China as the most populous country in the world. Given the increasing speculation that India might also replace China as the world’s fastest growing major economy, it seemed opportune to get a view on how things are developing.

All participants are bullish about their businesses in the country. Several already have significant operations, and most see major opportunities. The good news is that several participants are generating meaningful profits and cash – the bad news is that this creates issues in terms of cash investment and repatriation. And, of course, India is India – there are always plenty of regulations to navigate.

Main points and concerns:

• For those companies who are generating cash, it is a challenge to invest it. Most retain a conservative approach, which means safe investments – these typically return a rate which is below inflation.
• Cash repatriation is not without issues. The main vehicle is dividends: these attract withholding tax (the rate varies according to the jurisdictions), and are subject to complex tax rules. Cross border pooling is not allowed, and intercompany loans are subject to central bank approval.
• Within India, cash pooling is

Commentary

Working capital is always a hot topic – but never more so than now. Depending on how you count, most businesses are facing double, triple or more whammies:

• Difficulty obtaining supplies, resulting in lost sales, or seasonal goods arriving too late for the season (one participant is in the apparel industry, where this is crucial).
• Manufacturing inventories building up, as products cannot be completed or sold due to one or two missing components – but the rest have been bought and paid for.
• Supply chain management building extra inventory buffers
• Difficulty managing FX hedging programmes, as future cash flows become even harder to predict and forecast
• And, of course, this is all happening against an environment of rising interest rates, which increases the cost of holding inventory
• Margin pressures, due to increased shipping costs – especially given the increased use of emergency shipments, which come outside the agreed rates
• Coupled with inflation and recession risks, there is an increasing concern over distributors’ being left with unsold inventory, with an accompanying credit risk

As always, we had a lively discussion – I encourage you to....please Log In to continue