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Working capital management
Optimising strategies amid financial shifts.
Divyesh Modi share his insights on managing and improving working capital strategies in a dynamic financial climate. He highlights the importance of financiers understanding companies’ operational considerations and deploying strategically relevant funding solutions, as well as the need for greater transparency, including when working with fintech partners.
Ensuring balance sheet strength and management is going to be critical for corporates to be able to access the necessary financing for day-to-day operations, as well as then think about potential business expansion.
Head of Trade & Working Capital UK Sales, Barclays Corporate Banking
Harnessing a new financial landscape
We have seen some notable shifts in the industry in respect of the approach to working capital management over the past year. There is a notable disparity between large corporations and small to medium-sized enterprises in the current landscape. This contrast is particularly evident in the rising adoption of financial products such as receivables discounting, invoice discounting and asset-based lending (ABL).
Traditionally, the first two were more popular with smaller firms or highly leveraged firms, but we’re increasingly engaging in discussions with larger corporations with low leverage. This shift is a direct response to the mounting pressure on working capital, prompting treasurers to explore all available avenues for optimising their financial resources. We’re observing a significant transformation in that regard.
Speaking to a number of clients, it’s becoming a trend that extending payment terms is a key focus for treasurers. No surprises there, but there are, of course, limitations to this approach. This prompts discussions about supply chain finance, as companies must support the extension of payment terms for their supply chains with the necessary tools. We’ve certainly seen an increase in discussions about supply chain finance compared to this time last year.
A new interest rate environment
There’s still a lot of nervousness across the market about the level of interest rates right now. While the forward curves suggest eventual rate decreases, the timing remains uncertain. This overarching interest rate scenario is prompting companies to focus on optimising their balance sheets, encompassing solutions such as accounts receivable, accounts payable and inventory management.
Preparing for increased costs
Debt and leverage now incur higher costs than in previous periods. The cost of leverage is exerting a considerable impact on the permissible leverage levels within businesses, purely from a mathematical perspective. This increased cost of financing is a key driver behind the behaviours discussed earlier, including the search for alternative liquidity sources and the pursuit of working capital optimisation.
Outside factors
There’s also a significant amount of geopolitical uncertainty, so potentially, the UK is likely to experience low or even zero growth in the foreseeable future. All these factors indicate a challenging credit environment for many companies. Ensuring balance sheet strength and management is going to be critical for corporates to be able to access the necessary financing for day-today operations, as well as then think about potential business expansion.
Optimising the assets
Consequently, solutions that aid in enhancing the assets on the balance sheet, like receivables finance and ABL, are likely to garner increased attention and discussion. With this challenging interest rate environment, there’s probably going to be more onus on larger corporates to support their smaller suppliers. Supply chain finance programmes will continue to be of paramount importance. The focus on operational efficiency-related projects is poised to gain much traction and is likely to feature prominently in conversations between banks and treasurers.
A rise in fintech prominence
Fintechs have a promising future, and we are committed to continuing to foster a symbiotic relationship with them. What we find is that they are very innovative and agile in bringing solutions to the market.
What we have done on our part is to create an infrastructure within Barclays which allows us to now start plugging into fintechs very efficiently. We have just upgraded our core trade platform with a new system, which boasts full API integration and cloud-based functionality. Our aim in adopting this approach is to swiftly deliver cutting-edge solutions to our clients as soon as they emerge in the industry.
By blending the agility of fintechs with the traditional core strengths of a bank, we strive to provide the most optimal solutions to our companies. This strategy has proven to be highly effective for our clients and us.
Head of Trade & Working Capital UK Sales, Barclays Corporate Banking
Supply chain finance is a good example where we’ve made the call not to develop our own core platform but rather partner with other providers. We believe that this fusion of our robust balance sheet and understanding of clients’ needs, together with an established technology platform, offers the best possible solution.
Digitisation is undoubtedly a crucial and permanent aspect of our business landscape. The challenge lies in selecting the most appropriate solutions and fintech partners. Potential collaboration between financial institutions with substantial balance sheets and agile fintech companies, is an important trend that is likely to continue.
Divyesh Modi wishes to thank additional contributors:
- Chris Hawes, Managing Director, Debt and Capital Advisory, PwC
- Mike Rowe, Group Treasurer, Haleon
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