3 Takeaways from the Working Capital Forum Europe 2022

By Matteo Greco Product Marketing Director

From environmental, social and governance (ESG) to requests for transparency on supply chain finance (SCF) arrangements, the Working Capital Forum Europe 2022 in Amsterdam had a major focus on sustainability, transparency and liquidity management. One point quickly became clear to attendees—working capital management has become a universal concern across the entire organization.

With this event being one of the first occasions in several years for the working capital community to get together in person, I thought it would be fitting to share some of the key takeaways.

1. Working capital management has now become “everyone’s concern.”

In these times of rising interest rates, inflation and supply chain disruptions, managing working capital has now become everyone’s concern. While working capital optimization has always been a daily topic for both CFOs and treasurers, today, almost all CEOs have their eyes on it. When something is highlighted on the agenda of the commander in chief, everyone needs to pay close attention.

Market volatility, coupled with a precarious supply chain, are putting the survival of many global businesses at risk. Days Payable Outstanding (DPO), which in the past 10 years were continuously pushed out, have started to see a turnaround with suppliers having more leverage due to penury of components/raw material. This scarcity could lead companies to move from a “just-in-time” to a “just-in-case” approach, resulting in problems in inventory management and consequently increasing Days Inventory Outstanding (DIO). In 2023, to optimize the Cash Conversion Cycle and Working Capital companies will most likely focus on Receivables, and Day Sales Outstanding (DSO), together with alternative early payment solutions for their suppliers.

Key Takeaway: CEOs, CFOs, procurement, production, logistics, IT and every other employee need to play their own role to help their company overcome this difficult situation. Working capital optimization will no longer be seen as a financial KPI, but a fundamental objective to safeguard both clients and suppliers. Efficiency was the pillar we built the supply chain on, but liquidity management, automation, sustainability and forecasting in general will be the keywords for the years to come.

2. ESG must be integrated within working capital strategy, but many questions remain.

The ESG agenda is progressing faster, with a wider focus on sustainability for businesses. The impacts have a whole range of implications for finance, employees, investors, brand reputation, etc., and more importantly for working capital, suppliers.

In years past, we have seen both sustainable actions (financing for green projects, converting fleets to EVs, smart building technology, etc.) and sustainable SCF programs. But a working capital strategy that includes ESG needs to be integrated by all parties, such as banks, corporates and platforms.

In periods of low interest rates, offering an incentive based on ESG score to suppliers for an early payment program was a very interesting argument. But with interest rates rising fast, the incentives need to be big enough to convince suppliers to extend payment terms and join SCF programs. An ESG score could be used as a threshold or entry barrier to participate in an SCF program. However, buyers would have to sustain the non-ESG eligible part of their supply chain if they do not want to stop serving their clients. In addition, an ESG score is not a one-time measure; it continuously evolves. Buyers need to have their working capital platforms directly linked to multiple banks, as well as ESG providers, to allow their programs to evolve and expand.

Key Takeaway: The debate on ESG is far from being resolved but we can all agree that this is the direction we should take. How to make it more effective is the biggest question mark. Inserting ESG incentives as part of the strategy of new SCF programs is granted, but what about old programs? Typically, existing programs have already been negotiated with the maximum payment extension terms and lowest rates. How could we improve even more of those results by adding the ESG factor? Who will pay for it? Banks? Buyers? Or indirectly suppliers? It will be very interesting to see how this challenge will be integrated into future working capital strategy.

3. IFRS and FASB request for more transparency for SCF programs.

International Financial Reporting Standards (IFRS) as well as Financial Accounting Standards Board (FASB) has released a new standard for disclosure beginning in 2023. They would require buyers to reveal, among other information, the extension of payment terms for SCF arrangements for invoices paid early to suppliers by finance providers. That means companies (buyers) will need to provide certain qualitative and quantitative information within their financial statements to explain the nature, usage, changes and size of the program. The intention is to show the consequences these programs have on a company’s working capital, liquidity and cash flows over time.

The Greensil Capital scandal and similar incidents have dramatically traumatized and consequently transformed the need for transparency and the industry overall. This pushed some of SCF programs to be miscategorized as debt-like features. But at least for now, if suppliers are paid early by a funder, the disclosure needs to be mandatory–although they don’t have to reclassify them as bank debt, which was the biggest concern of buyers.

Key Takeaway: Transparency is always a good choice, especially if we truly would like to sustain suppliers and not simply take advantage of these programs. However, buyers with existing programs or plan to put one in place would need to have platforms that will help them to provide both qualitative and quantitative information and to disclose it on their annual report.

I wrote this blog taking inspiration from my colleague’s recent payments blog, and there is actually much more to share from the Working Capital Forum Europe 2022. I plan to write further blogs in the coming months and share thoughts or market changes that could help us move the entire working capital community forward. If you are interested in working capital, then you are welcome to follow me on Linkedin, or simply visit our blog section regularly.