Four themes on the future of working capital finance
Do traditional working capital tools still meet business liquidity needs? A flow special white paper outlines how ongoing supply chain disruptions, digitalisation and sustainability considerations could shape the future of working capital finance – and what this means for treasurers
Asset finance is in transition. Triggered by interrupted supply chains following the outbreak of the Covid-19 pandemic and the war in Ukraine, companies, as well as entire countries, are prioritising security of supply over reducing storage costs. This departure from once- esteemed just-in-time thinking could be accelerated by hikes in the cost of raw materials and energy, as well as shortages of intermediate products. Even though supply delivery times eased have eased a bit since the start of 2022, manufacturers in the euro area still need to wait a long time before receiving their orders (see Figure 1). Understanding how supply chains can become more
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resilient is therefore becoming a top priority for both governments and companies. Accompanying this is the need to rethink working capital financing. “Going forward, corporates will need to balance operational stability from larger inventories against the resulting reduced profitability,” says Hauke Burkhardt, Global Head of Lending at Deutsche Bank Corporate Bank. However, building resilience is not the only challenge to working capital management. In the flow special white paper Working capital finance – the future, which was published in January 2022 prior to the outbreak of war in Ukraine, experts from Deutsche Bank Corporate Bank teamed up with
Figure 1: Supply delivery times in the manufacturing sector
65 60 55 50 45 40 35 30 25 20 15
financial managers of leading German corporates to analyse four major themes which will reshape the future of working capital financing. This article summarises the key messages of each theme.
Theme 1: Strategic inventory management is crucial To strengthen the resilience of supply chains, the white paper states that companies need new sourcing strategies. It names three basic approaches to ensuring procurement security:
•Supplier retention and diversification: Targeted investment in supplier loyalty, such as in supplier finance programmes, strengthens partnerships and
binds parties closer together, even in crisis situations
• Insourcing or local procurement: International supply chains are particularly susceptible to disruption. Accordingly, it will become even more important for companies to have suppliers on-site in the future. Local sourcing also reduces dependence on container capacity availability and volatile freight rates
• Rising inventory levels: Supply chains become more robust when companies shift their inventory management strategy from just-in-time (JIT) to just-in-case (JIC). Specifically, this means that products are bought to be kept in stock as protection against unexpected increases in demand or price
Euro area
Manufacturing PMI Suppliers’ Delivery Times Index Manufacturing PMI Backlogs of Work Index
2008 2010 2012 2014 2016 2018 2020 2022 Source: Deutsche Bank, S&P Global, Macrobond
However, the JIC strategy also ties up more capital because of this increased inventory, which means that companies require new financing solutions (see Figure 2). “The goal must therefore be to allow companies to ramp up inventories while maintaining balance sheet efficiency,” says Burkhardt. One way to do so, the white paper points out, is by using inventory finance. In essence, this is asset-based interim financing based on the value of the respective preliminary products. “While this solution is particularly suitable for companies with high inventory levels and low stock turnover, they are generally more expensive than the established working
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