Cash & Working CapitalRisk Management

Balancing Act: The Realities of Working Capital Management

By August 20, 2020 No Comments

NeuGroup members and C2FO discuss the Fed, credit risk and negative cash conversion cycles.

Working capital management has taken on increased significance during the pandemic, and two members of NeuGroup’s Tech20 Treasurers’ Peer Group discussed the subject with an executive from C2FO at a NeuGroup Virtual Interactive Session this week. Here are some takeaways from the session by NeuGroup founder and CEO Joseph Neu.

  • The growing importance of data. C2FO’s platform is a great way to use working capital efficiently and provide liquidity to suppliers, but the company also supplies data that can signal credit risk. If a supplier is ready to pay a high rate for a discount, that is a signal for the credit team to look into why. 
    • Bankruptcies are expected due to COVID-19, so internal credit teams are hypervigilant and conducting thorough credit investigations along with bucketing the credit winners from the credit losers. 
  • The Fed effect. The Fed flooding the market with liquidity allows working-capital conscious companies (and anyone who cannot compete with the Fed for liquidity provision) to pull back. This means that platforms like C2FO need to play up their other advantages and find ways to channel central bank liquidity into their platforms. 
  • China reality. There is more talk about supply chain moves outside of China than action, even as the shift in mindset is on to manufacture/supply the domestic market from China vs. produce for export. 
    • For a lot of the inputs to manufacturing of electronics and tech, it is not really that easy shift from China to another country, even though the contract manufacturers can readily shift the manufacturing capabilities to other parts of the world.
  • Cash conversion cycles. This measure of the time in days it takes for a company to convert its investments in inventory and other resources into cash flows from sales is one key metric of working capital management efficiency. Negative figures mean you’re paying suppliers or distributors after you receive payment from customers.
    • If the goal is to get to double-digit negatives, -30 days for example, companies have to carefully balance the impact on the manufacturer that is accepting later payment and the distributor being asked to pay sooner. Can their balance sheets and credit situation carry your working capital efficiency metric? The path to negative cash conversion cycles cannot be simply paying suppliers later and asking distributors to pay earlier.
  • Proliferation of no inventory retail and distributor models. One accelerating trend is no-inventory models, where even retail stores will not own the inventory but rather leave it on the books of the manufacturer or the brand until the scan at the time of purchase, at which time the transfer is made directly to the purchaser.
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Justin Jones

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