October 2015

In the aftermath of the global financial crisis, the role of the corporate treasurer has evolved considerably. No longer seen as a “cost centre”, the treasury is now regarded as a “value creator” and the treasurer a pivotal figure in proactively managing the financial health of a corporate. Within this new role, working capital has become the lifeblood of the organisation

Without adequate and free-flowing working capital, treasurers are forced to seek alternative resources for shortterm funding; resources which are often costly and detrimental to the balance sheet.

Nonetheless, the importance of working capital was largely under-appreciated until two relatively recent developments. The first was the 2008 global financial crisis and the continued uncertainty in its wake, which impacted bank lending and liquidity sources. This threatened to bring commercial flows to a grinding halt.

The second has been the rapid growth of emerging (and intra-emerging) market trade, extending supply chains to distant and unfamiliar locations. This inevitably increases risk, and has highlighted the need for liquidity buffers capable of absorbing supply chain shocks. Fresh upheavals in the form of socio-political unrest have only added to the pressures placed on supply chains.

The obvious solution is, of course, to improve working capital by seeking better payment terms. But this throws up an additional concern: the fundamental contradiction between buyer and supplier objectives.

This DPO/DSO tug-of-war between counterparties has weakened supply chains at a time when strong relationships and strategic cooperation are more important than ever.

For treasurers, this combination of factors crystallised two key realisations. Firstly, they must ensure liquidity sources are sustainable in the long-term, even during economic upheavals. This put working capital into the spotlight as an internal – and therefore controllable – source. Secondly, any improvements in working capital cannot come at the expense of supply chain stability, meaning treasurers must circumvent the traditional DPO/DSO disconnect. And this has led to a dramatic increase in the popularity of financial supply chain (FSC) management.

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