According to Olivier Talvard, senior director at Redbridge, improving working capital requires careful execution to achieve its goals while simultaneously protecting the client-supplier ecosystem.

For companies that are successfully managing their growth with low interest rates, and for those whose treasuries are able to turn in a profit in a risk-free environment, working capital is rarely a top priority. Normally it’s kept under review, more or less continuously, according to the company’s specific needs. However, recent events have rendered this approach less effective.

The COVID-19 crisis has returned working capital management to the heart of treasury priorities. It’s no longer simply a matter of satisfying the equity analyst or the rating agency. The issue has become ensuring the survival of the business in the immediate or near term.

Protecting your weakest customers and suppliers

Net working capital in 2018 totaled more than €4,000 billion globally, which represents, on average, 47 days of sales. These figures have been rising since 2014. In France, for example, inter-company credit, which normally represents €600 billion per year, has jumped by an additional €100 billion since the start of the COVID-19 crisis.

Of the three components that define working capital, receivables and payables are undoubtedly the two that a company can best influence. But it’s a difficult task because it directly affects customers and suppliers – two relationships built up patiently over time. It is best to be conciliatory, understand customer requests for flexibility, and evaluate them carefully. Of course, preserving business relationships for the longer term has short-term impacts on working capital. This understanding should, therefore, be applied only to customers or suppliers who have been adversely impacted.

In the current context, customers – such as public or private entities with good liquidity that also have no problems with covenants and are largely unaffected by the crisis – should be the focus of collection efforts. In case of need, public bodies, as well as other crisis-monitoring entities set up by governments or professional organizations to deal with delinquent payers, are there to support companies.

Strengthening key performance indicators

At the operational level, any company should strengthen its key performance indicators (KPIs) for invoicing and the collection processes. Invoicing is sometimes complex in specific industries, and the enforced shutdown could be an opportunity to improve the order-to-cash process. Invest time in recovering long overdue accounts and gradually cleaning up an aging debtor book that has become untenable. This approach can also provide an opportunity to restart the relationship on a normal basis.

More than ever before, receivables and receivables management are best carried out in collaboration with the sales teams. Treasurers and credit managers can obtain useful information from sales staff and gain a better understanding of bottlenecks. Conversely, the sales force will appreciate being reassured that an important, or potentially important, customer has internal credit limits to accommodate the project under negotiation.

Avoid settling your invoices too early

On the accounts payable front, a company may be paying certain suppliers too early. This can be for historical reasons or to follow instructions from group operations, which can deprive the company of maximizing its supplier terms. It is therefore essential to review all supplier payment terms applied in practice – examining when you pay a supplier versus when was the payment actually due – to ensure you’re not losing a days’ working capital. It’s always appropriate to respect the supplier terms. However, in todays’ environment, time may be more essential than money. Hence, it does not pay to be overzealous in settling you suppliers’ invoices.

A company that receives the majority of its invoices in the second half of the month will be better off selecting a term of 45 days, end of month, rather than either 60 days net or end of month, 45 days. It is also highly unlikely that suppliers impacted by this change will push back, and those that do will not be sufficient to negate the overall benefit.

Monetizing your receivables

The actions discussed below directly affect a company’s intrinsic working capital before any recourse to financing schemes on the underlying elements: invoices issued and invoices received. However, these transactions are numerous and material, which can, at the very least, either alleviate a worsening working capital situation or neutralize its deterioration in accounting terms. There are too many of these types of arrangements to discuss here, and more types will likely develop over time. Nevertheless, for some lenders, holding invoices that have an economic or legal backing is seen as more advantageous in these times of increased risk, and it helps to mitigate their own risk.

The first of these financial schemes is the sale of trade receivables under a factoring or securitization program. With a deterioration in payments (punctuality, debtor risk, declining approvals) and a foreseeable increase in debt provisions, combined with a fall in revenues (directly linked to lower invoicing of their customers), banks and factor companies in securitization programs are faced with a complex equation. Yet companies report that factoring professionals have been supportive of their clients, accommodating many additional requests since the COVID-19 outbreak, including:

  • Being more forgiving of including overdue invoices for financing
  • Reducing the face amount retained to improve the efficiency of the program
  • Approving new debtors to compensate for decreases in existing customers
  • Accepting shorter-dated invoices, in the understanding that such invoices may actually take longer to settle in the current environment
  • Offering more rapid processing and validation on the side of the factoring companies

These accommodations and flexible approaches are well received and processed in good faith by the assignees (with whom a continuous and transparent dialogue is necessary) and can result in offsetting, at least in part, the extraordinary decreases in invoicing volumes. In view of the urgency of the situation, many of these amendments are made over the phone, so it is strongly recommended to confirm them in writing as soon as possible.

Concerning trade receivables securitization programs, one of the first short-term issues revolved around the legitimate adjustments to the level of commitment commissions, the basis of calculation (the size of the program), which has become far removed from the program’s financial contribution.

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