Swiss companies are under pressure because of low interest rates, a weakening economy and the uncertainties created by Brexit, notes a recent research report from the University of St Gallen Supply Chain Finance Lab (download in German available here). While these issues create challenges, they also create opportunities, not least in the field of working capital management (WCM) which can help exploit the opportunities offered.
Despite the positive liquidity position of companies, working capital management will remain of central importance and there must be greater emphasis on WCM efficiency. But WCM is not a static construct – it changes over time, not least because of emerging trends such as digitisation and ‘Industry 4.0’, automation and Big Data.
Closer cooperation with suppliers will result in an exchange of information with then and in joint WCM projects, the St Gallen research said. Purchasing organisations, for example, will play a role in increasing the profitability of the whole supply chain.
Innovation will play a crucial role as fintechs will benefit SMEs by offering better payment systems, for example. Working capital management doesn’t just mean reducing working capital: it also means a shortening of throughput times as digitised processes result in greater efficiency.
Low interest rates encourage consumption and investment in property. And they also encourage investment in process efficiencies to alleviate the pressure on margins. But while companies often embark on M&A programmes during times of low interest rates, St Gallen’s research suggests that M&A is currently of high importance only to around 16% of large companies.
Low interest rates coupled with a strong liquidity position in Swiss companies is making it easy to raise external finance, providing a degree of flexibility that enables businesses to focus on profitability, reorganisation projects and so on. Only 10% of Swiss companies reported having difficulties accessing finance.
Working capital strategies
Working capital strategy is an orientation point for the company. It determines how companies behave towards their suppliers and customers and how they trade off working capital requirements with customer satisfaction, for example.
While times of good liquidity afford the opportunity to improve working capital process efficiencies, there is a danger that working capital management is deprioritised when liquidity is less of a concern. Overall, 65% of companies said they were engaged in a working capital management project, but most were focused on a single area of activity, such as accounts receivable. Many of these initiatives re now at an advanced stage, however, as they were launched in response to the economic crisis of 2008-09. While there have been ‘quick win’ projects on payables and receivables, work on inventories has been more challenging.
Even though Swiss companies have a liquidity surplus, they still often choose to raise debt to finance investment. This, however, isn’t necessarily a contradiction, but rather a sign that businesses are conserving their cash against possible future adverse developments.
The St Gallen research found that 80% of Swiss companies pay their suppliers on time or early. The main reason for paying early is to secure price discounts, but there is evidence that companies are not securing all the discounts that they could. Companies that pay 1-5 days late are regarded as still being punctual. Only 6% of companies pay their suppliers more than five days late, the main reason being a liquidity gap.
There are three main trends worth noting:
- Digitisation and ‘Industry 4.0’ are not regarded as only affecting physical supply chains, but as having ramifications for working capital management, too. Almost half of respondents regarded this as the most important trend in working capital management. It includes trends such as the internet of things, Big Data, blockchain technology. Automation offers great potential. Blockchain will increase transparency through the supply chain. Predictive analytics will improve demand forecasts while ‘additive manufacturing’ and 3D printing will affect inventory management.
- The 2008-09 financial crisis showed that reducing working capital at the expense of partners in the supply chain has consequences for one’s own business. Therefore, the importance of cooperative approaches to WCM is growing. Large companies are increasingly offering their suppliers the opportunity to participate in reverse factoring programmes while many cash-rich Swiss companies prefer to deploy their liquidity to pay early and secure price discounts to improve their profitability.
- Fintechs are regarded in the media as being new rivals to banks, as well as offering alternative financing instruments such as peer-to-peer lending. Since the 2008-09 financial crisis, the restrictions placed by banks on SME lending in particular, has allowed the emergence of new financing solutions, independent of the banks. But 93% of Swiss companies see this emerging trend as not relevant or only partially relevant to WCM.