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Working capital in a post Covid-19 environment

As Covid-19 related restrictions start easing on July 19th, businesses are focusing on the likely implications for their working capital cycles. Read our article to see how you can remain in good shape going forward.

Working capital in a post Covid-19 environment

The Covid-19 pandemic has had a dramatic impact on business and in particular their working capital cycles. Demand was naturally constrained as consumers stayed at home, albeit online shopping increased and many clients re-evaluated how they approached the market. Suppliers looked to pass on shorter payment terms to buyers, with cashflow being critical. On the one hand we saw a marked reduction in the balances of those clients with a receivables finance solution while on the other hand we saw an increase in the volume of Export L/C’s which were used both to mitigate risk and as a way for Exporters to continue to offer terms while discounting on presentation of compliant documents with their banks.

As businesses emerge from a series of lockdowns they will have to adjust to a new normal and review working capital to make sure they remain in good shape. At the same time the geo-political situation across the world continues to be uncertain which combined with countries emerging from Covid at differing rates will continue to test the resilience of business and test even the most astute Treasurer.

We see three topics being key to business post Covid-19.

Restocking

As we move out of the pandemic, Companies will have to evaluate their stock holding policies and weigh up the move to a “just in case” framework as opposed to “just in time”, with some companies having no choice but to increase stockholding so as to satisfy the demands of their key customers. With the importance of having a diverse supply chain being clearly evidenced with the recent crisis in the Suez Canal, companies will continue to seek new sources of supply, often closer to home but new supplier relationships can lead to shorter payment terms and requests for more secure payment via Documentary Trade products. With Suppliers similarly having to prioritise orders, they will do so with an eye on payment terms as much as loyalty. The pull on working capital is likely going to get worse before it gets better. This is especially true in producing industries or highly seasonal sectors where there will be a lag between the cash outflows from sourcing materials, producing inventories ready to sell and then resultant cash collected from sales.

Trends in Working Capital post Covid-19

As we emerge from the pandemic what we have seen is a broad return, albeit slightly longer, to companies working capital cycles with the impact on stock turn being the most pronounced. Debtor and creditor days as a rule have shortened with payment being made more quickly at both ends of the cycle with Treasurers tightly managing working capital and controlling risk in a more uncertain world.

The impact of container shortages and elongated shipping times will continue to be felt, the additional 2-4 week extension to cash conversion cycles being particularly pronounced for those paying for goods whilst still on the water or who may see a reduction in the trade credit they enjoy.

Companies with less purchasing power have had to become less prescriptive about when they receive goods, capturing shipping availability as and when it arises resulting in a longer stock turn.
Help will continue to arrive from Supply Chain Finance, with more programmes being implemented by Corporates with the primary aim of supply chain support as opposed to payment term extension.

Withdrawal of Government schemes

We are also likely to see the tightening in the credit insurance market ahead of the withdrawal of the Government’s Trade Credit Reinsurance scheme at the end of June. We’re already seeing funding requests from clients to replace trade credit previously offered by suppliers, along with some clients demanding bank guarantees or standby letters of credit from their suppliers to act as a credit insurance replacement.

The full fall-out of Covid-19 has been softened slightly for many Companies by various Government programmes. Schemes such as furlough, VAT Deferral and the Coronavirus Business Interruption Loan schemes have been successful but as they start to fall away, Companies will need to re-adjust. VAT payments deferred during the pandemic now becoming due, the winding back of furlough, interest and capital repayments beginning on government backed Covid-19 loans schemes are all beginning to have an impact on a company’s liquidity. This is reflected in UK Finance April stats which show an increase in utilisation and reduction in credit balances across the various participating invoice finance providers. This reduction in liquidity could see Days Sales Outstanding increase, having come back from a peak of 62.6 days in May 2020 to pre-Covid levels of around 48.

Looking ahead

As we emerge from the pandemic Companies will need to continue to manage working capital closely and mitigate risk using all of the financing tools at their disposal. Supply will remain a key issue with pressure on payment terms as well as diversifying the Supply base to limit the impact of events like the Suez Canal blockage. It is also important to monitor the financial health of suppliers, to spread risk where possible through alternative sources of supply and to employ appropriate risk mitigation techniques. Tools such as Import Letters of Credit can be used where terms cannot be agreed or to hold suppliers to production/shipping deadlines; lead times will continue to be longer than pre-pandemic. In terms of stock, Companies will need to review their replenishment strategy, storage locations as well as the breakdown of raw materials/WIP/Finished /Goods. For those businesses particularly hard hit by the pandemic, they may also need to review their finances to look at how they afford to re-stock. For sales, Companies will need to keep a close eye on receivables and ensure credit control discipline is maintained so that delayed payments do not turn into bad debts – this could be through seeking earlier or advanced payments, credit insurance or by using documentary trade.

The second half of 2021 and beyond will have its challenges, Barclays Trade & Working Capital offer a range of Working Capital and Risk Mitigation products to help Companies overcome these challenges and prosper going forward. Whether it be Documentary Trade for risk mitigation or our Sales Finance solutions to accelerate Receivables, get in touch with your Trade Director today to see how we can support your business.

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