Working Capital challenges and how banks can support corporates

1. Internal use only
Capitalizing the Future:
Navigating through the new age challenges in
Working Capital Management
(a banker’s perspective)

2. 2 | Internal use only
We will be talking about………
• Working Capital & Working Capital Cycle: an introduction
• The criticality of Working Capital from an organization standpoint: a
Treasurer’s insights
• Challenges corporates face managing their working capital cycles
• How corporates can leverage technology in managing working capital
more efficiently
• How banks can support their corporate clients in managing their working
capital challenges
• Q&A/ observations
Agenda:

3. 3 | Internal use only
We will be talking about………
• Working Capital & Working Capital Cycle: an introduction
• The criticality of Working Capital from an organization standpoint: a
Treasurer’s insights
• Challenges corporates face managing their working capital cycles
• How corporates can leverage technology in managing working capital
more efficiently
• How banks can support their corporate clients in managing their working
capital challenges
• Q&A/ observations
Agenda:

4. 4 | Internal use only
Working capital cycle
Simply put, the working capital cycle
is the process of converting
inventory into cash. The more
efficiently a company can do this,
the more cashflow they can
generate. Higher working capital
requirements can put strain on the
balance sheet, reduce cashflow,
and increase risk in a business.
The timing between paying for raw
materials and collecting from
customers is the critical factor in
managing working capital.
Working Capital Cycle
Cash
Sales RM
WIP
FG
Raw
materials
Sales to
customers
Work in
progress
Finished
goods
Cash from operations
or borrowing

5. 5 | Internal use only
Multiple facets of Working Capital

6. 6 | Internal use only
Cash conversion cycle
The cash conversion cycle (CCC) is a
metric that expresses the time
(measured in days) it takes for a
company to convert its investments in
inventory and other resources into
cash flows from sales. Also called the
Net Operating Cycle or simply Cash
Cycle, CCC attempts to measure how
long each net input dollar is tied up in
the production and sales process
before it gets converted into cash
received.
It’s the number of days between
paying for raw materials and
collecting from customers.
Cash conversion cycle
Cash
Sales RM
WIP
FG
Cash flows
into the business
Cash flows
Out of the business

7. 7 | Internal use only
Buy Sell Collect
Pay
Working capital cycle
DSO
DWC (CCC)
DPO
DIO
Inventory Holding Period
• Raw materials stock
• Work in progress
• Finished goods
Collection
• Debtor
Conversion
Period
Payments
• Credit granted
by Suppliers
Days Working Capital
• Cash Conversion Cycle
Operating Cycle
Working Capital can be improved by reducing DIO, DSO or increasing DPO

8. 8 | Internal use only
Points to note about WC numbers:
• Calculation of the numbers is the easy part
• We, as bankers, need to interpret these numbers and bring these
concepts into our conversation. ”Its not about the calculation, its about
the business conversation”
• Understand the limitation of these numbers. They are the starting point
for a conversation, not the answer.
• Factors to include – seasonality, business goals, competitors, market
trends, industry benchmarks, future plans, etc.
• Numbers are relative - hence need to look at the trends and
comparisons
• Do some competitive/ industry benchmarking/ growth etc.
• How do the numbers align with company goals and stage of the
business cycle?

9. 9 | Internal use only
4 key factors in working capital optimization
Optimizing
Working
capital
Ensure
optimal level
of liquidity
Extend time
taken to pay
supplier
Collect
payment
from
customers
sooner
Shorten the
period that
cash is tied
up in
inventory
One of the biggest drain
affecting your working
capital requirement is
payment delays and long
credit terms. Cash is often
trapped as Accounts
Receivables on the
balance sheet.
Reducing the amount of
time it takes for inventory to
turn over will reduce your
cash conversion cycle. It is a
fine balance between
minimizing the amount of
time inventory sits before
selling and ensuring there is
no inventory shortage
disruption that will affect
bottom line.
Extending the amount of
time you have to pay
suppliers helps extend DPO
and improves cash flows.
Maintaining a fine balance
with your Suppliers is key to
nurturing the supply chains.
The primary purpose of
Working Capital Optimization
is to ensure that the
company maintains the
Optimal level of working
capital.
Having access to adequate
cash inflows to cover short
term obligations is of
paramount importance.

10. 10 | Internal use only
We will be talking about………
• Working Capital & Working Capital Cycle: an introduction
• The criticality of Working Capital from an organization standpoint: a
Treasurer’s insights
• Challenges corporates face managing their working capital cycles
• How corporates can leverage technology in managing working capital
more efficiently
• How banks can support their corporate clients in managing their working
capital challenges
• Q&A/ observations
Agenda:

11. 11 | Internal use only
Role of a Treasurer
 Treasury major responsibilities over next 12 – 24 month
10%
19%
20%
22%
26%
35%
40%
50%
52%
54%
58%
60%
100%
Regulations
Political uncertainty
Capital Structure
Fraud and cyber risk
ESG
Bank Relationships
Digitisation of Treasury (automation / AI)
LT Funding (capital markets and banks)
Risk Mgmt (FX, Interest rate, commdoity)
Tresury organisation and structure
Treasury technology tools
Working capital mgmt optimisation
Cashflow forecasting
ACT survey of European corporates - 2023

12. 12 | Internal use only
Role of a treasurer
Each company and market has its own characteristics, yet all
corporates share common working capital principles and challenges

13. 13 | Internal use only
Banking & Treasury Challenges
• Understanding the financial, physical and informational supply chains
and their collaboration customers, suppliers and banks
Physical and Financial Supply Chains
• What is the Cash Conversion Cycle optimization strategy of our clients
• Systematic initiatives can reduce CCC and Net Working Capital
significantly if managed well
• Understanding the 3 key levers of the Cash Conversion Cycle
• Days Payables Outstanding (DPO)
• Days Inventory Outstanding (DIO)
• Days Sales Outstanding (DSO)
Cash Conversion Cycle
• Demand Risk
• Collection Risk
• Supply Risk
• Production Risk
Supply Chain Risk

14. 14 | Internal use only
The top 5 challenges disrupting global supply chains today?
1.Rising geopolitical risk and tensions
2.High and volatile energy and commodity prices
3.Poor infrastructure quality
4.High inflation
5.Sanctions/ Tariffs/ Export bans

15. 15 | Internal use only
• Given their role is changing, we as bankers need to clearly understand their
current objectives and KPIs so we can target our discussions in the areas of
most importance to the treasurers.
• This will also enable us to be more customer centric when meeting the client
Treasurer’s insights

16. 16 | Internal use only
We will be talking about………
• Working Capital & Working Capital Cycle: an introduction
• The criticality of Working Capital from an organization standpoint: a
Treasurer’s insights
• Challenges corporates face managing their working capital cycles
• How corporates can leverage technology in managing working capital
more efficiently
• How banks can support their corporate clients in managing their working
capital challenges
• Q&A/ observations
Agenda:

17. 17 | Internal use only
CFO – what are their key DPO Challenges?
• Delays in payments – certainty in cash cycle
• Supplier concentration – good or bad?
• Timely delivery / right order size
• Timely identification of supplier issues
• FX risk for cross border supplier issues
• Balance sheet structure – DPO deterioration
• Balance between longer terms and costs of terms

18. 18 | Internal use only
Suppliers need early
payments, letter of
credit (L/C) route is too
expensive
High borrowing cost
for suppliers translates
into high cost of goods
Impact on
relationships as a
result of late payments
to suppliers
Restricted to manual,
paper-based
processing
Pressure on
working capital and
FX risk
Limits business
growth
Lowers profits Limits supplier
loyalty
High costs of
inefficient, manual
and time-intensive
processes
CHALLENGES
IMPACT
Typical procurement challenges

19. 19 | Internal use only
CFO – what are their key DIO Challenges?
• Obsolete stock
• Getting inventory on to their balance sheet
as late as possible
• Getting inventory out and off their balance
sheet as soon as possible
• No product outages
• Minimise raw material build up
• Be fully aware of auto replenishment
processes in place

20. 20 | Internal use only
CFO – what are their key DSO Challenges?
 Delays in collections – speeding up cash cycle
 Bad & Doubtful debts
 Delays / challenges in reconciliation
 Timely identification of buyer issues
 FX risk for cross border buyer
 Collection staff “attention to detail & focus” – early warning
 Balance sheet structure – DSO deterioration
 Balance between increasing sales versus lengthy buyer terms

21. 21 | Internal use only
High financing costs –
particularly for
standalone financing
rates
Distributors need to
hold stock to support
sales growth, requiring
significant equity
Local banks typically
require a high collateral
level for bilateral
lending
Managing stock optimality
during sales
peaks/troughs
Limited borrowing
capacity
Lack of collateral
available when
needed
Inconsistent funding,
constrains sales
growth
Constrained sales
during peak seasons
Limited access to
certain banking
services
CHALLENGES
IMPACT
Typical distribution challenges

22. 22 | Internal use only
In addition there are overall challenges around…….
• Lack of real time data to assess the efficiency of the working capital plan
• Lack of capacity to handle different scenarios
• Lack of cash visibility and transparency
• Issues around efficiency of processes and control. Manual operations
• Lack of accuracy in forecasting/ poor cash flow forecasting
• Lack of systems to track receivables
• Dead-on-arrival reports

23. 23 | Internal use only
We will be talking about………
• Working Capital & Working Capital Cycle: an introduction
• The criticality of Working Capital from an organization standpoint: a
Treasurer’s insights
• Challenges corporates face managing their working capital cycles
• How corporates can leverage technology in managing working capital
more efficiently
• How banks can support their corporate clients in managing their working
capital challenges
• Q&A/ observations
Agenda:

24. 24 | Internal use only
How to leverage technology to address working capital
challenges
Leverage digital tools and technologies to optimise working capital and liquidity
management:
- automate invoicing and collections
- integrate accounting and banking systems. Use of API technology and new
generation of financial management tools
- implement a dynamic discounting program
- adopt a supply chain finance solution
- use a cash pooling system
- build a centralised data infrastructure. Leverage AI and Machine Learning tools for
better forecasting
- explore alternate financing options such as digital lending by fintechs and other
solutions such as BNPL, use of early payment platforms etc

25. 25 | Internal use only
How to leverage technology to address working capital
challenges
Leverage digital tools and technologies to optimise working capital and liquidity
management (contd.)
- improve cash visibility by automating cash forecasting process
- run scenario analysis including stress test potential situations
- perform variance analysis to improve forecast accuracy

26. 26 | Internal use only
The reality…..
Only 14% of CFOs are using technology for working
capital management
In a recent EY survey, more than 58% of CFOs felt they do not have enough
time to properly develop and define strategic decisions…………..
and yet only 14% of CFOs are using technology for Working Capital
Management

27. 27 | Internal use only
We will be talking about………
• Working Capital & Working Capital Cycle: an introduction
• The criticality of Working Capital from an organization standpoint: a
Treasurer’s insights
• Challenges corporates face managing their working capital cycles
• How corporates can leverage technology in managing working capital
more efficiently
• How banks can support their corporate clients in managing their working
capital challenges
• Q&A/ observations
Agenda:

28. 28 | Internal use only
How banks can support their clients in managing their working
capital- the 4 pillar approach
Understand client
needs; questions
• Who are your
suppliers / payment
terms / method of
payments?
• What are your biggest
challenges around
working capital
management?
• How are these
challenges impacting
your financial and risk
goals?
Understand client’s
industry and provide
insights
• Incorporate industry
benchmarks
• Share best practice
• Provide insights from
experience
• Share use cases from
previous successes
Apply banking
products and
capabilities
• Identify bank products
that meet client needs
and help clients
achieve their business
outcomes
Pillar 1 Pillar 2 Pillar 3
And the 4th pillar- seamless execution

29. 29 | Internal use only
Working Capital …..the opportunity
“ On any day, market estimates say that USD 40 trillion waits in
businesses’ accounts receivables”
“In S&P 1500 companies alone over USD 500 billion of liquidity is
trapped”

30. 30 | Internal use only
Being a trusted partner
Product Solution
Relationship
Transaction
Vendor
Trusted
Partner
Niche
Bank
Relationship
Manager