During these unprecedented times, we internally debated postponing thought leadership content until there was some semblance of normalcy. Ultimately, we decided our ability to share knowledge that can help small & medium size businesses outweighs the need to be sensitive to the newscycle. We expect you are having countless conversations on how to manage risk and be resilient during this disruption. We hope you find our perspectives helpful and supportive of that effort.
What Matters Right Now?
Cash Conversion Cycle
Most larger businesses (250 Million in Revenue and Above) take working capital for granted. The day to day focus is more optimizing capital structure than liquidity. A crisis like the one we are facing now forces everyone to pay attention to managing cash flow. Drawing down lines of credit is one way to ensure liquidity. Another is to balance the cash conversion cycle. What do you or your clients have tied up in receivables and/or inventory versus the capital of their suppliers that is held up in payables. Do you or your clients have a clear understanding of the cash conversion cycle? The more visibility they have into the details, the better equipped they will be to adapt quickly within today’s trying environment.
- As mentioned above, if a company can slow down its payment to vendors through extended payment terms, it will create a lift to working capital.
- While less easy to control, tightly managing collection of Account Receivables should also be a priority. Companies should look across their customer base and determine where they are likely to get stretched and where they have leverage. Having or putting in place a prudent AR management process is also necessary.
Clear and frequent communication with customers and suppliers will prove helpful with these calls to action. Additionally, the cash conversion cycle is a good indicator of a company's ability to maintain stability during a stressed and unpredictable economy. Analyzing the cycle will make it easier to determine the best way to boost liquidity, whether it be a short-term fix at a higher cost or a lower cost, long-term solution.
Supply Chain Health
What steps can a company take to stabilize a supply chain that has been massively disrupted by a global pandemic? This is certainly a complex question. Before making any strategic decisions, the single most important step is to keep lines of communication open.
- Develop an understanding of the challenges facing your suppliers -- business disruption, liquidity, sourcing, etc,
- We are seeing first hand in our own portfolio of clients, that buyers are extending payment terms to their suppliers by an additional 30, 60 and even 90 days. While the largest suppliers likely have buffers, these changes result in an existential crisis for the small and medium size suppliers in the chain. Opening up liquidity lanes to these suppliers should be of paramount importance to your clients.
- One possible solution to help stop or slow down supply disruption is to offer an accelerated payment program to suppliers. A program like this can help businesses keep the lights on by providing fast, predictable working capital.
- Ultimately, the better companies serve their suppliers, the better those suppliers can and will serve your clients, especially during the toughest of times.
When it comes to supplier relationships, maintaining diversity and promoting stability should be the goal. This dislocation creates an opportunity to evaluate, improve processes and solidify vendor relationships critical to long term success.
What Matters in the Future?
The current environment is evolving quickly but we see the underlying strain stretching well into 2020. The greatest sensitivities to shocks and downturns rest in the long tail which is made up of the smallest suppliers in the chain. Providing on demand early payment of invoices is the fastest way to help suppliers. This is where we can help. If your business or clients are looking for options to improve liquidity without negatively impacting suppliers, we have programs to help.
We will continue to provide frequent communication as we assess the impact to supply chains, particularly the small and medium size businesses.