Cash poor, inventory rich: the perfect storm
August 3rd, 2021
Covid has hit business with a double whammy and right where it hurts – the balance sheet. With consumer demand dampened and inventories at an all-time high, global supply chains have become gridlocked and with it, so has the hard-nosed cash that is supposed to flow freely.
Cash flow has become cash drought.
This is the central finding in a report out this July from JP Morgan. Entitled the Working Capital Index 2021, this annual report focuses on the working capital metrics of the companies that sit on the S&P 1500 Index.
Its key research finding is staggering: an estimated $507bn of liquidity is stuck in these companies’ supply chains. The research is clear: this is the highest figure it has seen in over a decade and a significant increase on the 2019 figure of $497bn.
Two of the biggest take-outs of the report were, on one side of the coin, lengthening of inventory cycles by an average of just over six working days and, in turn, the stretching of debtor days as larger corporates changed payment terms with their suppliers. The report also identifies several other findings that illustrate how businesses have struggled to maintain a positive cash position throughout the pandemic and beyond.
The report highlights that this led to a deteriorating Cash Conversion Cycle across the overwhelming majority of vertical markets.
According to the research, two-thirds of the companies in the 1500 Index have — or still are — experiencing a challenging cash position. This, in turn appears to be driving a number of other trends within larger corporates as they struggle for liquidity. Cash-to-sales levels are now at the highest they’ve been in seven years as businesses looked to fundraising and cash preservation measures.
There is no doubt that the support many businesses received in the form of government grants and tax deferrals will have been of value to many. But for smaller businesses, the impact of lengthening debtor days, stockpiling inventory, and customers applying pressure has all taken a toll.
As businesses begin to prepare for recovery, many will start thinking less about cash preservation and more about cash deployment to fund growth. One such tool to help drive this is supplier finance.
As a concept, it is certainly not new — it is the financing of an invoice once the buyer has accepted to pay. It can be used at a number of stages in the value chain, but at the heart of it lies a simple transaction: a process that begins with a supplier sending an invoice to a buyer.
Once the buyer has approved the invoice, it has, in effect, created a payment obligation. It is at this point that the supplier can sell that invoice to a financier. For the supplier possibly facing 90 days payment terms, it means they can get funds within days — albeit at a lower cost — while the buyer can pay on pre-existing payment terms.
This is the ideal solution for unlocking the supply chain and getting cash flowing once more for the supplier and the buyer.