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The Treasurer: Complex Cash Cycles and Working Capital Finance

Jun 6, 2019

Companies with complex ledgers can access funding by unlocking data on cash, explains Peter Bousquet.

For companies with complex cash cycles, managing and sourcing external funding for working capital liquidity can be a major challenge. Investment grade companies may be able to rely upon uncommitted lines from their bank group – but most companies cannot access this type of low-cost funding. Increasingly, these companies are turning to securitisation as a structure that, when properly executed, unlocks liquidity for even the most complex of general ledgers.


Daily or weekly cash forecasting can be a burdensome and complex task, incorporating both on-book and off-book items into a daily total. These items may include services rendered but un-invoiced, as well as anticipated receipts and debts. Intraday updates, such as rebates, off-setting payables, credits, unallocated cash and unrealised discounts, can drive further noise into the general ledger, as they do not bring the clarity needed for decisions and working capital efficiency.

This can be particularly complex for global commodities traders, multinational logistics firms and local employment services companies, which have certain challenges in common:

  1. Offsetting obligations – suppliers are also buyers;
  2. Credit and invoice cycles – cash requirements are due within invoice cycles;
  3. Rebates and non-standard payment agreements – delivery and acceptance terms can extend beyond standard factoring terms.

Mid-cap companies facing these challenges have traditionally turned to asset-based lending (ABL) facilities supported by corporate guarantees. This approach can increase companies’ borrowing capacity and provide flexibility, while providing collateral and specific security to reduce interest expenses.

However, in practice this is a suboptimal solution that ties up bank corporate credit capacity without realising the full value for collateral. What’s more, it places additional operational requirements upon the finance team to deliver reports and manage audits to meet lender covenants.


A more effective approach is to enhance the use of collateral by homogenising enterprise resource planning (ERP) data and building an eligibility and collateral management process that matches the company’s business operations. When properly structured and executed, this approach means that funders can underwrite and extend credit based only upon receivables and collateral performance. The general ledger data and standard operating procedures can then deliver the information needed to support daily cash needs.

In this instance, the invoice and collection cycle remain unchanged, allowing the liquidity provision to match the complexity of the operating environment. The data – combined with transparency from the finance team through to the investor – enhances the value of the assets, thereby increasing the facility size, reducing treasury complexity and increasing liquidity.


Offsetting agreements, in which companies purchase services from counterparties that are also their customers, materially impact factoring and ABL advance rates for borrowers. This is because receivables that are flagged as having an offsetting balance are traditionally excluded as collateral. The data needed to flag consolidations of supply and purchase may be held in different systems and may therefore not be represented in standard reports.

Systems that can integrate both payables and receivables into credit management can overcome this issue by providing a unified view. This brings the opportunity for greater transparency and the historical analysis of dilutions for offsetting obligations, thereby allowing for net position funding to reduce the eligible receivables by the actual payables balance across the group. As the company’s working capital needs to grow, liquidity adjusts to support growth, instead of constraining it.

Investors that are used to funding facilities with no offsetting balances may be comfortable with this approach if data analysis and reporting can provide clear parameters, ensuring that funders are not left with material disputes in the event of a default.


In order to build sufficient collateral, many companies issue invoices based upon forecasts, or use recourse structures to increase advance rates against invoices. However, this approach may confuse the general ledger, invoice and credit balances. At the same time, relying on the finance team to provide funders with a ‘clean’ number leaves credit providers looking to the guarantee to support liquidity, as opposed to commercial collateral.

Employment services companies receive daily figures relating to site time and attendance, while consigned inventory consumption forecasts are based upon order and dispatch cycles. In both cases, the ERP has line items, such as payroll for employment services or inventory drawdowns and transfers, which can be used as the basis for an increase in collateral. If the company’s platform is able to track, report and model this business activity, it can be classed as un-billed receivables.

In most cases, this will not materially increase the size of a facility, as these services and sales are converted into invoices within a week or month. However, for a company facing liquidity calls intra-month, the availability of funding should stabilise, allowing greater liquidity before invoices are raised.

The ability to draw against un-billed receivables can allow companies to manage standard eligibility and counterparty concentrations. Liquidity is then provided based on billed and un-billed services delivered, supported by the company’s standard reporting. The increase in collateral intra-month should not impact pricing or recourse requirements if the provider is able to represent the data asset and historic trends to a level that will allow investors enough comfort.


For distributors and traders, commercial arrangements with key suppliers and buyers are designed to drive volumes. Final sales invoices therefore have a range of agreements and retrospective rebate mechanisms that can drive day-to-day fluctuations, with material credits and rebates shared and invoiced based on offtake or supply agreements. This can cause counterparty credit issues, offsetting and contingent payment requirements – and confusion for funders.

An effective approach is to rebuild historical data, particularly when counterparties span numerous products, regions and payment terms. One commodity trader used a matrix approach to maximise its collateral efficiency for key obligors, eliminating those with net negative offsetting cumulative balances. By removing noise, the trader was able to materially improve the advance rate, reduce the number of entities in the facility, eliminate insurance expense and change its liquidity provision.


In conclusion, many companies have material receivable balances – but the operating requirements of their markets may create noise on their reports. While traditional cash-flow lending can support their requirements, a lack of transparency and tight covenants do not permit the operating flexibility needed for seasonal, cyclical and working capital-heavy companies.

Providers like Demica are able to alter corporate liquidity by translating data and transforming assets – thereby turning noise into signals for investors, and corralling receivable assets into non-recourse structures that give comfort to investors and auditors. In this way, the assets defined in the historical analysis can reduce lender risk and credit cost, with liquidity matching the company’s business cycle requirements.