Our first round table in London since 2019 almost ended before it began. As our diverse group of treasury, corporate finance, and procurement leaders began to describe the supply chain issues they were facing, more than one revealed that their policy for the moment was to, ‘Forget about working capital.’ Not, thankfully, because it was no longer a concern, but because of the vital importance of securing increasingly scarce supplies of everything from grain to microchips, paying what the market demanded, and carrying inventory in far greater quantities than would have been thought wise in the old days of ‘optimisation.’
One procurement chief in a multinational electronics firm found himself between two conflicting priorities: As consumer spending declines thanks to inflation and rising interest rates, so the pressure is on to control costs across the business. However, with a global shortage of microchips, prices are rising as scarcity increases - so much so that the launch of a significant new product has been postponed for lack of components. ‘For us, it’s all about the rising cost of money,’ he said, referring not just to the cost of capital but to FX, and the need to manage these variables more carefully than ever before.
One notable exception to the procurement race was a consumer goods multinational that had effectively vertically integrated, owning their key commodity crop from ’seed to consumer’ and ensuring consistency of supply in quantity - though even they could not control the weather.
A global treasurer at a beverage firm also noted the difficulty of getting consistent grain supplies - not just in quantity, but also in quality. As a result, farmers began to offer poorer grades to keep up with demand, where supplies from Ukraine and Russia have been effectively cut off.
Just in case
Our entire group, then, acknowledged the move from ‘just in time’ procurement with lean stocks and tight tolerances to ‘just in case,’ building up stocks against whatever the future might hold - which is becoming more challenging to predict by the day (see our Stockholm round table report for why black swans are becoming white swans).
With that in mind, the importance of effective cash forecasting was on the rise. No one underestimated the difficulty of that task - as one treasurer joked, ‘I have a 99% record on cash forecasting - we were wrong 99% of the time.’ Yet there were ways to increase the quality of forecasts. Like so many elements of the modern treasury, it came down to data - its availability, quality, and our ability to analyse it.
Perhaps best equipped for forecast accuracy was a multinational which had invested in setting up an in-house bank (based on SAP), giving near-real-time global visibility of cash with a corresponding increase in forecast reliability. The same treasurer also used other advanced tools, such as virtual accounts, bringing greater reconciliation accuracy and simplicity to banking arrangements.
Payables and receivables finance
Despite the changeable conditions, working capital tools and techniques remained an essential part of the toolkit. Both payables and receivables financing were in use. Treasurers took a pragmatic approach, pursuing the cheapest cost for funding. One treasurer described the choice between receivables finance and a revolving credit facility simply: ‘It’s all about the BPs (basis points) However, all were aware of the forthcoming tightening of standards around the reporting of supply chain finance and keen to ensure they kept their programmes on the right side of the debt/payables divide.
One priority that had not changed due to global conditions was environmental, social, and governance (ESG), which remained a priority in procurement and treasury. Everyone present had ESG priorities with some, such as a global mining concern, seeing them as a priority above all others, as the gateway to cooperation with national governments. Supplier finance was seen as one route to encourage compliance with ESG standards across the supply chain.
As the meeting closed, participants were asked what they would suggest should be the priorities of treasury and procurement in this changeable economic climate. Five themes emerged:
Working Capital Forum Round tables are open to senior leaders in treasury, procurement, and payments and are held under the Chatham House Rule. If you would like to join a similar event, contact firstname.lastname@example.org or apply directly for our future events in Edinburgh, Dusseldorf or Amsterdam.
© Adaugeo Media Ltd