Cash & Liquidity Management

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Managing Working Capital Through Uncertainty Anyone hoping that 2012 would herald brighter economic horizons will so far have been disappointed. Economic stagnation is affecting both sides of the Atlantic, with extreme volatility in Europe.

Managing Working Capital Through Uncertainty

by Jiten Arora, Global Head of Sales, Transaction Banking, Standard Chartered Bank

Anyone hoping that 2012 would herald brighter economic horizons will so far have been disappointed. Economic stagnation is affecting both sides of the Atlantic, with extreme volatility in Europe. The effects of globalisation mean that no region is immune, but although growth in Asia, for example, has cooled, it has the policy tools available to rebound.

Despite anticipated growth of only 2.6% this year, which masks considerable differences globally, there is light ahead, particularly in emerging economies such as China that are likely to see some growth acceleration in 2013, supported by government policy stimulus. The dark clouds still sit over the west, however, as many economies are running out of policy tools with which to respond in the event of another shock. A potential rise in energy prices if, for example, relations between the United States and Iran worsen, ongoing challenges in Europe, lack of growth and huge government debt owed by the developed economies, equalling an average 105%  of their total GDP, combine to form a ‘perfect storm’ of risk facing the global economy in 2013.

In this environment of ongoing uncertainty, OECD and emerging market multinational corporations (MNCs) alike are focusing on developing markets in pursuit of growth and potentially greater resilience. The working capital and risk implications of their changing footprints differ however, as do the bank solutions they require to address them.

OECD Corporates

Supply chain financing and receivables services

OECD corporates continue in their quest to remove working capital from their balance sheets to improve their key performance indicators. At the same time, they are looking to reduce costs and enhance the working capital cycle, including working with vendors and clients in emerging markets to move away from traditional trade methods such as letters of credit (LCs) to open account. This has an obvious knock-on effect for these counterparties. For example, smaller or lower-rated suppliers will have difficulty obtaining credit without an LC. Treasurers of large MNCs are sensitive to the need to meet their own working capital objectives but also to maintain the resilience of their supply chain by enhancing working capital across their entire ecosystem. Consequently, supply chain financing and receivables financing programmes are gaining traction, leveraging higher-rated companies’ credit standing to support the wider supply chain.

Liquidity tools

As OECD MNCs increase their business in regions such as Asia, a greater proportion of liquidity is accumulated in heavily regulated markets. These companies are therefore seeking solutions to enhance visibility over cash globally, accompanied with interest optimisation and/ or notional pooling solutions (depending on the country) that maximises the value of liquidity to the group.

Processing costs

When expanding globally, companies are seeking to avoid fragmentation of their operations and escalating costs. The need to maintain efficiency and control is driving the extension of financial shared services, as well as regional and global treasury operations, not only in Europe and North America but also into Asia and other emerging regions.

Local access

Finally, companies need appropriate access to markets in which they operate and have plans to grow. In many countries, comprehensive payment and collection services need to be underpinned with an extensive bank branch network, as opposed to relying on a few branches located in major cities. This is particularly important for new ventures involving smaller distributors in remote locations who prefer to be paid in cash and/or over a bank counter. Similarly, companies need timely access and full granularity of receivables information, requiring a banking partner with the necessary technology solutions and integration capabilities to facilitate automated account reconciliation and posting.

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