Working capital in an evolving environment
Staying nimble amid rising interest rates and an evolving inflationary environment means vigilant working capital management and ensuring ready access to liquidity at efficient rates. Managing rising interest rates and high inflation has been top of mind for treasurers and corporate treasury teams as many seek solutions to minimize the impacts of margin compression.
The Fed increased rates by 25bps on March 22 with the Bank of England following suit on March 23. In his March 22, 2023 press conference, Federal Reserve Chairman Jerome Powell stated, “The process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy” and had the view that tightening credit conditions could quell the need for future hikes1.
Amid a decrease in consumer spending, inventory management has become less efficient over the last two years due to a shift from “just in time” to “just in case” as a tool for countering supply chain disruption. Sellers are tasked with holding more inventory financed at their own cost of capital on behalf of their customers. Credit spreads between investment grade (IG) and high yield (HY) rated companies widened at the outset of the Fed’s hiking cycle and underscored the importance of sellers having access to liquidity at efficient rates.
Corporates have focused on working capital for the last 15+ years and are very active in managing payment terms. Days Payable Outstanding (DPO) has lengthened by an average of nine days since 2014 for S&P 1500 listed companies (see chart below). Exiting the pandemic, companies have found ways to lower Days Sales Outstanding (DSO) by launching receivable finance programs and participating in supply chain finance programs to counter buyers requesting longer payment terms.
1 FRB, Chair Powell’s Press Conference, 2023
How Citi can support sales and customer resiliency
while managing DSO & credit exposure
With the varied financial conditions over the last three years, customers are seeking flexible and longer payment terms. Sellers can leverage accounts receivable financing to potentially inject liquidity into sales distribution channels while managing DSO. For example, today a large consumer and industrial goods manufacturer utilizes a structured AR finance program in addition to commercial paper to provide their business with liquidity. Structured accounts receivable (AR) portfolio financing could be an efficient working capital optimization tool to reduce DSO, while allowing longer payment terms for strategic customers.
Continued management of working capital
As noted after the 2008 Financial Crisis, remaining vigilant with working capital will help stabilize operations during periods of crisis and accelerate recovery and growth post crisis. Today, Citi has many mature Trade and Working Capital solutions already in place and is well positioned to help corporates navigate these turbulent times.
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