Navigating the New Terrain of Working Capital Management

Supplier Negotiations, Cash-to-Cash Cycles, and More: Insights from The Working Capital Forum’s latest Round Table in Palo Alto

In the ever-evolving world of corporate treasury, the dynamics of working capital management are experiencing a transformative shift. The game has changed, and businesses must adapt to the new landscape. Corporate treasurers from diverse sectors recently convened over dinner in Palo Alto to discuss the key challenges and strategies reshaping the cash management environment.

In this article, we explore the insights shared by these industry experts on topics ranging from intense supplier negotiations to the importance of cash forecasting.

Once swift and straightforward, supplier negotiations are now anything but. Payment terms have emerged as a focal point in these discussions, leading to what some treasurers describe as the resurgence of 'friction' in supplier relationships. The reasons for this shift are multifaceted. The lingering impact of the pandemic, fluctuating market conditions, and changes in global supply chains have contributed to this new intensity. ​

Palo Alto Round Table Dinner

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​   Event sponsored by

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One manufacturer was both offering supplier finance to suppliers and being offered it by customers - but, as he pointed out, for a larger coirpoiration like his, the rates on offer from customers were rarely attractive.

Cash-to-Cash Cycle Focus in the Age of Higher Interest Rates

In the current climate of higher interest rates, the treasurers emphasized a renewed emphasis on the cost of cash and the need to improve the cash-to-cash cycle. Days Payable Outstanding (DPO) varies significantly across sectors, but all treasurers are acutely aware of the necessity to optimize this metric. Payment terms varied dramatically by sector, from 30 days through ‘month end plus 90’ to terms that stretched into the months. Supply chain finance was a recognised tool to help - but only when the rates offered were more attractiuve then could be obtained elsewhere.

The group also discussed the increased use of receivables finance as a valuable financial tool. However, a clear distinction emerged between 'old-fashioned' factoring programs and modern receivables finance solutions. One treasurer at atech firm which had spun out of a larger parent had inherited a receivables finance programme which was poorly priced and difficult to manage, buit others had much better experiences and found it a valuable tool. However, as one treasurer pointed out, receivables finance, ‘Can be like a drug’ - difficult to stop using once you had started.
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Cash forecasting remains a perennial challenge for treasurers. The most advanced professionals adopt a holistic approach, combining 'top-down' and 'bottom-up' methodologies while leveraging technology to collect data. A key consensus was the importance of a 'single source of truth' for cash visibility and forecasting, eliminating the chaos of managing multiple, disparate systems. For some, this came through their ERP system; others were looking for solutions designed just for this task. All were agreed that something better then spreadsheets was needed - though they also conceded that ‘giving up spreasdheets was a hard thing to do. 

Whatever the technology used, it was unanimously agreed that there is no 'magic bullet' to completely solve the issue and that engarement with every contributor to a cash foprceast was essential.
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Five steps to develop a company-wide Cash Culture

1. Get to know the business - reach out to others beyond treasury and don’t be slioed.
2. Look for transparency - a single source of truth for cash positions is essential
3. Make sure you work with a range of partners, whether banks or fintechs, to get the results you want.
4. Look carefully at what your organisation rewards teams for  - is cash optimization a KPI?
5. Instill a cash mindset across the group, not only in treasury

Supply Chains in flux

Although the supply chain crisis triggered by the pandemic has largely subsided, the impact lingers. Many companies are still stockpiling substantial inventory on a 'just-in-case' basis, moving away from the 'just-in-time' model. For this group, the concept of 'near-shoring' has become a tangible reality, with Mexico overtaking China as the primary manufacturing location for at least one larghe firm around the table. The pandemic has significantly altered supply chain strategies.

For this group, successful working capital optimization now hinges on instilling a cash-focused mindset across the entire organization, not just within the treasury department. One treasurer even shared the practice of delivering a cash presentation at every company 'all-hands' meeting, underlining the importance of involving all employees in the working capital  journey.

As the meeting closed, those present were asked to share their thoughts on some of the steps treasurers would take to navigate the changing working capital environment (see box).  If there is an upside to higher interest rates, it's that cash and working capita, are once again front of mind - and treasurers can be the 'chief liquidity officers' of their companies.​

​The Working Capital Forum Palo Alto Round Table was sponsored by SAP Taulia and supported by Deloitte. These topics will be discussed in a free-to-access follow-up webinar open to everyone. Click here to register.