Page 5 - MUFG Spring 2021

beginning of the meeting you told me that Working Capital was always a priority. What initiatives do you have in place to enhance your position?” His exact response was, “I can’t think of one.”
At that point I realized for this Treasurer, working capital was a buzz word for which he regurgitated a standard answer. The reality though was that working capital, as defined in financial dictionaries, was not a priority for the company. The company’s priorities were the strength of their supply chain, client relationships and mitigating the risks associated with running out of inventory. It is also easy to make a case that within the current low interest rate environment, freed up cash does not offer the same value that it once did. Considering the above, I couldn’t argue with his priorities, but it did make me wonder if this was the initial seed of a trend? Was working capital losing its luster or even already dead?
Prior to March 2020, it was rare that a working capital conversation would follow this path. Since March 2020, I have been having similar conversations almost weekly. But calling this a negative trend in the prioritization of working capital doesn’t feel right. It doesn’t paint the right picture because it doesn’t paint the whole picture.
By strict definition, working capital management is about increasing the capital available to an organization to use for its day- to-day operations, the wily balance of current assets and current liabilities. To optimize working capital, companies implement a myriad of different solutions targeting lowering inventory, extending and standardizing payment terms, improving forecasts and monitoring and reducing customers that are slow to pay. Almost all companies that do this well reap the benefits of these efforts. Just last week, I spoke to another large company that made it clear working capital was the top priority of the Treasury team. They were well versed in the exact cash release derived from every one-day extension of their average DPO because it was built into each individual’s annual goals.
If it’s a fair statement that the growth of working capital is a sound business practice,
why would any company abandon the effort?
The answer, one might argue, is prioritization. Maybe. Partially. But that is not what I heard over the past year. What I heard is that pinpointing the focus on ‘current assets less current liabilities’ doesn’t work as a stand-alone idea. Working capital management can’t exist in a vacuum and it’s never clearer than when economic, logistic and workforce uncertainties abound. When those things happen, working capital conversations shift outward. They include all the processes and components that impact the supplier, not just the payment, and they include all the processes and components that impact the customer, not just the inventory and the receivable. Most importantly, focusing on these processes and components is focusing on working capital management.
Economies grow, recess and recover. At some point in the future rates will rise and uncertainty will wane. At that point, will those working capital conversations narrow? I hope not. Working capital management is highly effective at positioning a company for success but we cannot revert to looking at it in the vacuum of assets and liabilities. The conversations are already shifting. Let’s not go back.
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SPRING 2021 / MUFG TRANSACTION BANKING AMERICAS GROUP