Cash & Liquidity Management

Optimising Cash and Working Capital in a New Environment Constrained liquidity in the banking market, along with the downturn in consumption and public expenditure, have forced companies to postpone their long-term investment strategies and focus instead on more conservative business strategies. Cash and working capital have become top priorities and many corporates are now engaging in programmes to optimise inventory, payables and receivables management. In this article, Dámaso Cebrián looks at how this has led to the growth of supply chain finance and how it can lead to an improvement in financial efficiencies, as well as effectively managing risk.

Optimising Cash and Working Capital in a New Environment

by Dámaso Cebrián, Head of Trade & Supply Chain Finance Products Europe, Banco Santander

The change in the economic cycle, together with the financial crisis, has forced companies to shift from expansive and aggressive business strategies to conservative positions that allow them to weather stormy conditions. The downturn in consumption and public expenditure, combined with constrained liquidity in the banking market, have forced companies to postpone their long-term investment strategies and focus instead on cash. Cash and working capital have become top priorities, and we have seen many of our clients engaging in programmes to optimise inventory, payables and receivables management. 

The crisis has had a particular impact on SMEs, who often lacked the financial resilience to weather the storm. Consequently, sectors that rely heavily on SMEs as a key part of their supply chain have been focused on securing their supplier base, leading to the growth of supply chain finance. While this concept has existed for many years, and proved very successful in certain countries, it has become a mainstream solution. By using supply chain finance, major companies with a clear focus on cash generation have improved their working capital position and optimised their cash conversion cycle, without damaging the position of their customers and suppliers

While today’s situation is calmer than at the peak of the crisis, there is still considerable business uncertainty. As we wait for clear signals of recovery, companies continue to focus on optimising their operating cash flow and managing their risk. There are various implications of this. One is that multinational companies are far more aware of the potential risks associated with a single global provider for transaction banking, and a single global banking model is no longer valid. Another is that companies are looking for opportunities to unlock cash across the financial supply chain. In some sectors, inventory has been a key concern as a steep downturn in consumption has led to inventory spikes, consuming financial resources at a critical time. In other cases, increasing days payable outstanding (DPO) has been an area of opportunity. For example, with clear differences in average DPO across countries, companies are reviewing commercial terms offered by their subsidiaries, who often work with the same vendors, and seeking to standardise terms. Confirming® allows suppliers to discount confirmed invoices through an intermediary bank, based on the buyer’s risk profile. This leads to an additional source of cost-effective financing for suppliers without affecting their access to bank finance: increasing cash flow predictability, improving their financial position and strengthening ties with key customers.

Santander has always been a key player in supply chain financing. Since the introduction of Confirming 20 years ago, initially in Spain, it has become a key solution provided by Santander and continued to evolve in line with clients’ changing requirements. Today, Santander has a clear advantage both in the capabilities of the product, the result of having developed our platform, people and procedures for over 20 years, and in the bank’s strong, stable financial position. As a result, Santander has led the expansion of the supplier financing concept in Europe and Latin America, and many more companies have now successfully deployed such programmes or are in the process of doing so.

Looking ahead, multinational corporations will continue to seek financial efficiencies and manage risk. While control and cash optimisation are typically key drivers, reducing transaction costs is also becoming a priority. Although many companies have not yet fully centralised their treasury organisation, there is a clear trend in this direction, and banking services in the future will need to fully support a centralised model, whilst also recognising the specifics of each market and providing the flexibility to support certain functions managed at a local level. These will differ by region according to the regulatory environment and practices, financial instruments and automation. 

Santander has developed several cash management solutions to deliver comprehensive regional and global transaction banking capabilities, across cash management, supply chain finance solutions and trade finance. In particular, in Latin America, we are confident that these solutions will complement our unrivalled retail presence with leading regional technological and operational capabilities, to become the undisputed leader in transaction banking in the region. Having a strong regional presence brings considerable value to our clients, whilst also facilitating their centralisation objectives. At Santander, we are focused on offering multi-local cash management capabilities as well as a global approach to cash management service to provide our clients with a consistent experience across markets.  

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