Cash & Working CapitalCOVID-19

The Road Beyond Recovery: Corporates’ Upbeat View of Working Capital Management

By September 8, 2020No Comments

A majority of companies in a recent Deloitte poll say that they are already in stabilization or growth mode.

Working capital is an issue never far from a treasurer’s thoughts, and the uncertainty the pandemic has brought to corporate cash flows has made it only more relevant. A recent survey by Deloitte of 1,500 C-Suite and other executives revealed what Anthony Jackson, a Deloitte Risk & Financial Advisory principal, called unexpected results.

  • A majority of respondents said their companies are in stabilization or growth mode, meaning 42.9% have stabilized liquidity, reduced leaking cash, and identified cost reductions and inventory strategies, while 13.2% in growth mode have unlocked capital for investment, can predict cash flow and reduce costs, and have improved financial forecasting. 
  • Another 22.3% are still in recovery mode—starting to unlock liquidity, control of cash outflows, and other working-capital necessities—and 11.1% are in crisis mode. “I would have guessed a smaller number in stabilization and growth mode, and at a minimum more saying they were still in recovery mode,” Mr. Jackson said. 

Ever hopeful. Also surprising, Mr. Jackson said, was the optimism of respondents about their organizations’ state a year from now.

  • Only 3.1% saw their companies in crisis mode, still working to improve liquidity strains, accounts receivable delays, inventory stockpiles, etc., while 11.7% foresee being in recovery mode.
  • Most saw their organizations in either stabilization (26.9%) or growth (45.1%) mode.

Greatest strain. Pandemic-driven disruptions have hindered working-capital management with difficult forecasting ranked as most problematic (31.8%), followed by delays in accounts receivable (19.2%), reduction in liquidity (18.3%), and delays from shifting to a remote workforce (9.2%).

More frequent updates. Unsurprisingly, the pandemic has prompted nearly half of respondents, 48.5%, to update their working capital management efforts more frequently. Another 32.3% said they’ve seen no change, while 3.2% said the frequency has decreased. 

  • Mr. Jackson said companies are taking steps they wouldn’t have pre-pandemic, including increasing their use of data and analytics to identify opportunities within their working capital processes.
  • For example, he said, companies often have payments leaving accounts payable earlier than the due dates, even when they have policies in place to prevent that. “The question becomes, where are the breakdowns in the process that allow that to happen and how can that be changed,” he said. 

Avoid risky steps. Mr. Jackson said pushing back payments to vendors has been a popular way to conserve cash, but companies must carefully assess whether that’s truly beneficial in the long term.

  • If pushing out the term results in a key vendor leaving, it could have a big operational impact. “So you want to be very strategic and thoughtful about how you do that,” he said. 

Discount discipline. Mr. Jackson recounted one CFO’s belief that his company was taking all possible accounts payable discounts, but closer analysis found that was true only 85% of the time. Correcting the remaining 15% would improve the firm’s liquidity position by $8 million.

Long-term vision lacking? Deloitte concludes that many CFOs are still not focusing on long-term efforts to improve capital management, relying instead on short-term fixes.

  • Many companies have a false sense of security, perhaps counting on further government support to weather the pandemic.
  • And the significant percentage of companies that anticipate being in growth mode within 12 months may be another reason for avoiding more sustainable changes.
Justin Jones

Author Justin Jones

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