How Treasurers Can Optimize Working Capital

Working capital is an important indicator of a company’s financial health. By using it to its full potential, treasurers can help strengthen an organization’s balance sheet and increase its value.

When it comes to effectively managing working capital, here are a few things to consider.

Supply Chain Finance and Dynamic Discount

Liquidity throughout a buyer’s complete supply chain is paramount in today’s economic environment. Buyers can demonstrate their commitment to the relationship by sponsoring a supply chain finance program, which leverages buyer risk. Suppliers who see their cost of capital higher than the buyer’s cost can use the program to sell their receivables at a discount and receive payment sooner from the supply chain finance provider.

On the other hand, if a buyer is in a cash-rich position and can pay their bills sooner, it is possible to receive a financial return with a dynamic discount. Buyers should seek to work with a bank that can offer both supply chain finance and dynamic discount solutions on a single platform.

Inventory management

The COVID-19 pandemic has demonstrated how disruptive events, such as supply chain challenges, affect the just-in-time inventory management method. As a result, more and more organizations are now adopting the case-based inventory method or sourcing inputs from nearby suppliers.

Inventory drains capital and uses up large balance sheet capacity. Companies should actively engage with banks to see how their assets can be better managed or managed off balance sheet. Banks can help create structures that improve inventory management and optimize associated costs without disrupting current supply chain arrangements.

Sell ​​trade receivables

Businesses should always try to have a facility in place to sell a pool of customer accounts to a bank at a discount for three reasons:

  1. Increase variable sales
  2. Accelerate debt collection
  3. Create an additional source of liquidity

If the bank’s discount for receivables is less than the company’s weighted average cost of capital, the company may benefit from discounting receivables off-balance sheet and on the basis of actual sales.

Additionally, an accounts receivable financing program can help increase sales internationally and locally, as any excess exposure to corporate and sovereign buyers can be transferred to the bank by selling the receivables. Thus, companies could actively manage the ongoing sales metric, allowing banks to be creative with receivables financing structures.

Risk mitigation

Without appropriate risk mitigation tools, companies could face lost sales and credit write-downs and be subject to economic uncertainties.

Many countries manage their currencies based on the US dollar, as it is the most frequently used currency in global trade. Therefore, monetary policy changes that benefit the US economy do not always benefit emerging market countries.

With a tight monetary policy, liquidity may become scarce due to capital outflows. Importers are therefore unable to raise funds for purchases, which can lead to lost sales for sellers in Organization for Economic Co-operation and Development (OECD) countries.

A commercial letter of credit payable at sight can help increase sales and reduce buyer risk. In a high interest country, the seller can help raise the required amount of US dollars for purchases. Offered by the seller, this could give the buyer access to the seller’s capital markets and provide longer payment terms, which could help the seller when negotiating the terms and conditions of the commercial contract.

Building for the future

Helping clients optimize their working capital is a strategic priority for JP Morgan. For a review of working capital opportunities in your organization, please contact one of our Treasury Services team representatives.

© 2022 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, NA Member FDIC. Visit jpmorgan.com/cb-disclaimer for disclosures and disclaimers related to this content.

About Donnie R. Losey

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