As the light at the end of the COVID-19 tunnel grows brighter, businesses must assess how they manage their working capital and their supply chains. Our expert panel from across the corporate and treasury world discussed how this could take shape.
- The working capital story of COVID-19 has been one of contrasting fortunes, with many large corporates sitting on large piles of cash while SMEs have struggled.
- As firms are weaned off the crutch of government financial support, it will become clear as to whether firms have made their working capital support systems more robust, and also which ‘pandemic trends’ are here to stay.
- Our panel of experts also discussed in the recent webinar ‘Demica Insight Q1 2021: Shape of the Recovery’ the collapse of Greensill, and what that might mean for the trade finance industry.
A Tale of Two Pandemics
The impacts of COVID-19 on the business world has effectively been a tale of two pandemics, with many larger firms able to quickly digitalise operations while many SMEs shut their doors.
The pandemic has hit certain industries harder than others. Demica insight data shows that while automotive tier 1 suppliers struggled in 2020, they have started 2021 strongly as much of the world reopens. In contrast, some ‘pandemic trends’ may be here to stay, with demand for IT equipment being strong throughout 2020 and remaining that way in Q1 2021. This sector is interesting from a working capital perspective, as the growth of the ‘device as a service’ model generates consistent receivables, creating a receivables finance opportunity.
However, what has gone under the radar is how the pandemic has similarly had disproportionate effects on the working capital of large corporates compared to that of SMEs. Damian Glendenning, the former Treasurer of Lenovo and currently Chairman of CompleXcountries, noted during the webinar: “There is a big difference between how large companies are faring through all of this which is generally pretty well, and how small companies are doing, which are generally struggling”. He further noted that “most large companies are sitting on much bigger cash balances than they would usually hold”.
While these large corporates are sitting on piles of cash, in part due to government support, many SMEs are struggling to meet their short-term commitments. Research by BDO from December which was presented during the webinar revealed that 18% of respondents to a UK mid-market-targeted survey cited access to finance as their biggest threat to business in 2021, while 28% of businesses reported that they had only 1-3 months of cash reserves. 5% had no cash reserves at all.
Supply Chain Health: Nurturing Support or Jungle Rules?
While many large corporates have not faced these issues, this is their problem too. This is because the respective universes of the large corporate and the SME meet each other in the supply chain. Large corporates often have thousands of SMEs in their supply chain, and are dependent on the survival of these firms in order to be able to operate.
This issue led to one of the key talking points of our webinar discussion: Whether large corporates should prop up their supply chains in the post-pandemic world. On one hand, it was argued that corporates should support their supply chain, as supply chain health is crucial for any business. This was affirmed by our panellist Simone Del Guerra, CEO of UniCredit’s factoring business, who remarked “We really do hope that companies realise that a healthy supply chain is fundamental”, adding that he hoped that the pandemic-fuelled growth in demand for supply chain finance he has seen would continue, as to support the SMEs most negatively impacted by the pandemic. However, it was also argued that weaker firms in the supply chain should be allowed to fail.
The decisions that large corporates make in this domain will have huge consequences for how SMEs are able to manage their working capital, which in turn will be a key factor in the demand for working capital finance solutions from these firms.
Ripping off the Bandage
Crucially, the time for large corporates to make these decisions is fast approaching, as governments around the world look to withdraw financial support for businesses that were negatively affected by the pandemic. Our panel agreed that the withdrawal of government support will be a crucial moment in understanding the working capital health of large corporates.
For now, there has not been a noticeable shift in the data for many industries during the pandemic. What is not clear however is if this is due to the blow of the pandemic being softened by the bubble-wrap of government support, or whether there is genuine robustness in the supply chain.
Our panel discussed how firms that are sitting on piles of cash would be well-advised to be using this time to optimise their own working capital before government funding is withdrawn, otherwise they will find themselves in a situation where they are trying to stem the tide of withdrawn funding after the damn has already broken, especially with a potential downturn on the horizon. This point was made by our panellist Jenny Shutt, a Director at BDO’s Corporate Advisory Business, who stated that, with UK Government funding looking to phase out in September, “we do have a six month window where this (working capital) needs to be prioritized”.
Looking to the Future
The decisions made by large corporates will not be the only factor in determining the demand for working capital solutions. The collapse of Greensill has posed a number of questions about the future of supply chain finance, particularly the response from regulators.
The webinar audience was polled over how hard they thought the impact of the Greensill collapse would be felt across the industry. 29% believed that the issues were totally specific to the company, while a 61% majority felt that the collapse would have a moderate impact on the industry, with increased disclosure on transactions likely. Just 9% felt that changes to accounting standards would be introduced, such as a push for SCF to appear on-balance-sheet.
To learn more about the issues discussed, register and watch the webinar by clicking below.
Maurice joined Demica in October 2017 from Wells Fargo where he was CEO, Commercial Distribution Finance, responsible for a $3.0bn of receivables assets and over 400 people. Maurice joined Wells from GE Capital where he held a number of senior positions including Chief Commercial Officer of GE Capital International. Prior to GE, Maurice worked as a senior investment banker at Lehman Brothers, Bankers Trust and Paribas.