The influence of Corporate Treasury on Working Capital

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....