TEN WORKING CAPITAL CONSIDERATIONS FOR BUSINESSES
Potential working capital crunch
For many businesses, significant investment in new stock will be required to support higher activity levels. The ability to self-fund may be compromised by increasing cash burn as revenues lag costs and JobKeeper and other repayment holidays end.
The “bullwhip” effect
Critical and regular assessment of demand patterns will be vital post COVID-19 to avoid over-stocking and unnecessarily locking up cash in working capital. A focus on S&OP, integrated forecasting and placing more frequent orders for smaller quantities will be key for businesses looking to avoid the “bullwhip” effect.
Debunking old rules of engagement
Pre COVID-19 supply chain management was largely predicated on volumes being consolidated to drive lower unit costs and minimal inventory holdings. Whilst this may have worked in a stable global economy, it has been found to bring increased risk. The challenge for management teams will be balancing the need to reduce risk to an acceptable level while also pursuing profit restoration.
Diversify to de-risk
Businesses with a high concentration of suppliers and customers were most at risk of COVID-19 disrupting their operations. Building resilience across the supply chain will require a quick evaluation of alternative sourcing options, reassessment of sales reach and distributor strategies, and identification of new customer opportunities, channel shifts and emerging markets.
Technology as a tool
With potentially more customers and suppliers to manage, businesses will need to harness technology to drive efficiency. From the shift to ecommerce, to automating processes to accelerate reaction times and accessing data to inform decisions around product mix, pricing and working capital terms, technology will provide a key competitive advantage moving forward.
Collaborations and partnerships
Building working capital resilience will require end-to-end management of the supply chain. Initially post COVID-19, this will help businesses determine if longer term support is required for “tier 2” suppliers. Over time it will allow management teams to better align demand, supply and capacity planning. Already there are signs of greater collaboration and businesses partnering to better leverage freight capacity and
Opportunities for distressed M&A
There is an expectation that as Government stimulus and temporary measures to curb the level of insolvencies roll off, there will be an increase in distressed M&A activity. Those businesses that can manage their working capital to maximise free cash flow will be best placed to take advantage of the opportunities that arise.
The Payment Times Reporting Framework (PTRF)
The new PTRF legislation will require businesses with turnover >$100 million to report biannually on their payment terms and practices for their small business suppliers (turnover <$10 million). With the PTRF set to go “live” on 1 January 2021, businesses should seek to understand their reporting and compliance obligations, and to assess supplier terms, payment performance and the impact of the new legislation on working capital and cash flow.
Socially responsible business models
Consumers are continuing to push for greater transparency around social responsibility. The Ethical Fashion Report has graded 130 companies on the strength of their systems to mitigate against the risks of forced labour, child labour and exploitation in their supply chains. In Australia and New Zealand, the promotion of ethical business practices has seen over 300 businesses register as “B Corporations” (based on social and environmental standards). This number is expected to grow post COVID-19.
Knowing your counterparties
Businesses are taking the opportunity to reset processes and procedures across the working capital cycle, including implementing tighter pricing and purchasing controls and delegations of authority. This extends to managing counterparty risk through a systematic approach to due diligence, having a credit function independent from the finance team and including working capital governance as part of the internal audit program.