Working Capital

Corporate Treasury & FX in Colombia, Chile & Peru

Report date: 
4 Mar 2025

Commentary

Amongst treasurers, Latin America does not have a great reputation. Even if we have come a long way from the past of military dictatorships and very difficult regulations, it remains more complicated than many other regions. Peru, Colombia and Chile all have seen significant turmoil in the recent past.

So – where do we stand today? It says a lot that, on this call, the peers’ main concern was about whether to use local or foreign banks, and whether the FX rates for foreign remittances were better onshore or offshore. 

Of course, there are causes for concern, especially about the direction of the economy in each country. Peers gave different views on this, especially in Colombia. But, generally, the problems companies face are manageable:

  • The biggest complaint was about the financial transaction tax in Colombia: as its name suggests, the “cuatro por mil” is a 0.4% tax on every money transfer above a monthly threshold. This can represent a significant cost when cash is being moved between banks, even within the same entity. There is a workaround which involves the use of a fiduciary: this does not work for transfers with third parties, and it blocks the cash for 24 hours. Another alternative for cross border international payments between subsidiaries is to settle them offshore.
  • All peers are working to improve working capital. Factoring and supplier finance solutions are available, but factoring is felt to be expensive. 
  • Other avenues for improving working capital include trying to use more modern payment methods. There was a feeling that these countries are maybe less...

 

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Topics covered in this report: 
Tax, Bank Relationships, Working Capital, Factoring, Payments - domestic, Payments - cross border, Payments-digital, payroll, Cash Repatriation, Hedging FX
Service providers discussed in this report: 
Banco Davivienda, Banco de Chile, Banco de Bogotá, Banco de Credito del Peru, Bank of America, JP Morgan, BBVA, Santander, Citi, Yappy

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Corporate Treasury & FX in Turkey

Report date: 
24 Oct 2024

Commentary

Turkey has been in some form of economic crisis for a long time. CXC discussions on it always highlight the many challenges: high inflation, funding issues, FX shortages etc. At the same time, there has always been an array of workarounds: the country typically avoids official regulatory measures. For example, there have never been official exchange controls – it was just that banks had very limited access to foreign currency, and had to prioritise their customers.

Last year, following the elections, Turkey adopted some very conventional – and painful – economic policies. The currency devalued by 35% between June and July 2023 – from 19 to the USD to 26. The benchmark interest rate was fixed at 50%. Prior to this, there had been a series of unconventional measures: official interest rates were low, but banks were required to buy bonds issued by the Turkish government for between 60% and 200% of the value of any loan they made, effectively killing the loan market. With the new measures, the situation seems to have stabilised: foreign currency is now freely available, the exchange rate continues to decline, but is more stable. It is now significantly less difficult to obtain local funding. Inflation has reduced: it was at about 85%: it is now closer to 30%.

Interestingly, three other countries which have been in very difficult positions have adopted similar austerity measures: Argentina, Egypt and Nigeria have all been through significant devaluations and greatly increased interest rates. This leads to short term economic contraction, but seems to be having positive results for the fundamentals.  

How has this affected business and the people? The consensus on the call was that the situation was difficult, but improving. Some participants were wondering whether they should change their business model to reduce the risk, but all feel it is a country and an economy which is too important to ignore.

Specifics:

  • Cash management operations have been normalised. One participant has excess foreign currency, which they place in an offshore bank account in Abu Dhabi – this process has been in place for some time.
  • Banks are once again willing.....
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Topics covered in this report: 
Funding, Intercompany loans, FX, Hedging FX, Working Capital, Banking, Bank Relationships
Service providers discussed in this report: 
Deutsche Bank, BNP Paribas, Citi, TEB, HSBC, FXall

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The influence of Corporate Treasury on Working Capital

Report date: 
15 Oct 2024

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....
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Topics covered in this report: 
Working Capital, Supply Chain Finance, Invoicing, Factoring
Service providers discussed in this report: 
Citi, Calculum

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Treasury Policies & Processes for Crypto Transactions

Report date: 
26 Jan 2023

Commentary

This call took place five days after FTX filed for bankruptcy. However our discussion did not dwell on crypto as an investment (We haven't found a treasurer who would). The interest for treasurers is to help their companies understand the business opportunities of the metaverse, and that isn’t going away.

According to Gartner,’ [https://www.gartner.com/en/articles/what-is-a-metaverse] by 2026, 25% of people will spend at least one hour per day in a metaverse for work, shopping, education, social media and/or entertainment’, and…’A metaverse is not device-independent, nor owned by a single vendor. It is an independent virtual economy, enabled by digital currencies and non-fungible tokens (NFTs).’

So it's no surprise that many companies are developing strategies to capitalise on what could be a massive business opportunity. Participants in this call comprised treasurers representing companies at different stages of this journey, all facing the challenge that the regulatory and financial infrastructure available is at an early stage of evolution.

  • About half of the participants are still investigating the use of crypto and exploring how it works in case it does evolve within their businesses, but still not necessarily wanting to accept crypto or handle crypto within treasury operations.
  • Risk management to enable safe use in Corporate Treasury remains paramount and it isn’t easy.
  • We are seeing continued evolution around the NFT space and using crypto for settlement. But it continues to be quite limited.
  • Accounting requirements for how crypto currencies are handled are still not clear and not necessarily sustainable for the future. Regulations are going to evolve.
  • It is fascinating to hear, for the first time, crypto working capital
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Topics covered in this report: 
Wallet providers - crypto, NFT, Working Capital, Metaverse, KYC, API, CBDC, Crypto currency
Service providers discussed in this report: 
Coinbase, Mt Pelerin, Bit Panda, Etherium, Anchorage, Decentraland, Somnium Space, Coinfund, Churning Group

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The Impact of the Supply Chain Crisis on Working Capital

Report date: 
26 Sep 2022

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

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Topics covered in this report: 
Supply Chain Finance, Supply chain, Working Capital, Inventory, Procurement
Service providers discussed in this report: 
C2FO, Prime Revenue, Nexus

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