Cash & Liquidity Management

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Enhancing Working Capital for Growth and Competitive Advantage As a result of complex global supply chains and growing pressure on margins, optimising working capital has steadily become a key objective for treasurers both in Germany and across Europe.

Enhancing Working Capital for Growth and Competitive Advantage

by Kate Pohl, Region Head, Transaction Services Sales, Germany and Austria, ING, with Yesim Erdem Onat, Director, Working Capital Solutions, Germany and Austria, ING and Hans Sawatzki, Director, Transaction Services Sales, Germany, ING

While cash management has long been a priority for corporate treasurers, optimising working capital has emerged strongly as a key objective both in Germany and across Europe. With complex global supply chains and growing pressure on margins, unlocking working capital can be key to maintaining a competitive advantage and achieving growth.

According to PwC’s Global Working Capital Survey, 2014, Cash for Growth, improvements in working capital performance have slowed in recent years following initial success during the global financial crisis. Indeed, according to the study, absolute levels of working capital have continued to grow, resulting in the world’s largest multinationals having to find an additional €500bn simply to finance working capital rather than investing in growth. European companies are making the most substantial improvements, but performance continues to lag behind the rest of the world, with the predictable impact on competitiveness and hampering growth. To address this, treasurers and finance managers of German corporations are becoming proactive in identifying and delivering on opportunities to enhance working capital.

The business imperative

In Germany, working capital levels are typically higher than corporations headquartered in other parts of Europe as well as the United States, partly due to German corporation often being more conservative in their approach to cash and liquidity management. While financial conservatism remains an important characteristic, it can be costly. With cash often trapped in complex supply chains extending around the globe, economic uncertainty in China and Europe, and growing competition from both established and emerging players, cash tied up in working capital is preventing companies from paying down debt, expanding into new markets and investing in innovation.

Developing the business case

While working capital optimisation is a priority for companies across Europe, it can often be difficult for treasurers and finance managers to identify and prioritise opportunities for working capital improvement as well as aligning with other internal stake holders like Procurement. Working with an expert banking partner can be valuable as an enabler of financial and operational efficiency. Such cooperation can be a rich source of information helping to identify improvement areas and learning from experiences observed in the market. For example, performance benchmarking against industry peers has become increasingly important in order to measure working capital performance and determine priorities. It is not only treasurers and finance managers who use benchmarking to evaluate the performance of their own organisations, but analysts and shareholders are also paying greater attention to these metrics.

Industry standards and differentiation

Underpinning all working capital initiatives is the need for timely, accurate and complete cash visibility. This is putting increased pressure on banks and vendors to deliver real-time information in a format that can be integrated with core processes and decision-making frameworks. Having achieved this (often a challenging process in itself given the diversity of banks, countries, currencies and formats involved), priorities can differ widely by industry and business model. In manufacturing industries in particular, inventory levels are often necessarily high, so the focus may be more on accounts receivable or payables. In some cases, this can result in initiatives to refine customer credit and reduce days sales outstanding (DSO) or extend payment terms e.g., by introducing commercial cards or supply chain finance. We note that some treasurers and finance managers are implementing highly automated order-to-cash processes from eInvoicing through to customer collection and reconciliation.

Balancing objectives

The specific nature of each company’s working capital requirements and priorities means that banks need to take a highly personalised approach to addressing these needs, building integrated solutions across the financial supply chain. Given the number of points in the working capital cycle at which value can be created, banks that are most successful in supporting financial supply chain efficiency are those with the ability to understand the client’s needs and design solutions using comprehensive trade finance, working capital and cash management techniques. Furthermore, solutions need to be sufficiently flexible and scalable to support clients’ requirements as they change over time.

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