Spend Matters welcomes this guest post from PJ Bain, CEO of PrimeRevenue.
In my opinion, if companies don’t get aggressive in how they manage their working capital and mitigate challenges associated with free cash flow in 2019, it will be to the detriment of the global economy in 2020 and 2021.
“Hello transformation. Meet reality.” Those four words sum up where the global business climate has taken us in the last year, and where it will lead us going into 2020. Whether in the context of industry or geopolitical transformation, the economic implications of transformative change have exposed vulnerability. How can companies fund transformation in an economic climate that’s equal parts encouraging and concerning?
Despite macroeconomic trends such as U.S. trade policy yielding new tariffs on raw materials like steel (25%) and aluminum (10%), and a looming Brexit, the global economy has boomed, but uncertainty is on the rise. If the last year was all about transformation, the next two years will be all about finding the cash to fuel it despite anticipated volatility across many aspects of business. Trends that will drive increased interest in improving working capital include:
- Companies are over leveraged. There is a total of $19.5 trillion in global corporate debt and not all balance sheets can afford to take on more of it. It’s time to diversify both short-term and long-term funding sources. Globally, supply chain finance, known as reverse factoring, represents the best alternative to source cash at a low cost without incurring debt on the balance sheet.
- A more complete realization of the impact of new tariffs. Industries like automotive, construction and solar are already rationalizing their supplier bases as a result of new tariffs implemented in 2018. In 2019, the impact is spreading while Chinese tariffs are dominating the conversation of uncertainty. Procurement teams will need to respond to new disruptions and new suppliers – both of which could drive up costs. In some cases, companies have let it be known that they are considering shifting manufacturing plants to non-tariff locations such as Vietnam instead of China. We’ve seen that from our own customers already this year.
- The restructuring of key trade agreements. CPTPP and USMCA (formerly NAFTA) are just two international trade agreements that were top of mind in 2018 and continue to spark uncertainty in 2019. Companies are looking for ways to mitigate the potential financial impact of these changes and minimize any negative impacts across their supplier bases. Freeing up working capital is going to be key to this mitigation.
- More meaningful collaboration with suppliers. Whether it’s a new product or joint working capital initiatives, the transformation happening across many industries will require unprecedented collaboration between suppliers and buyers.
- The skyrocketing cost of logistics. Freight costs are on the rise, especially in the U.S. where driver shortages continue to plague the market. Companies are seeing price increases of 10 to 15% (or more) now and into the coming year. The UK might see significant cargo price increases due to haulage capacity shortages. Mitigating these cost increases is a procurement imperative.
- The rise of cognitive procurement. Big data, AI and innovation in fintech will power new decision-making capabilities and agility in procurement – but this will require companies to pay more attention to benchmark data. One example is payment terms. What is the optimal payment term for suppliers in a certain industry, of a certain size and/or in a particular geography? How does a company’s existing terms stack up to industry benchmarks, and how do you reconcile any gaps in a way that doesn’t harm suppliers?
Working Capital in 2019 and 2020
The reality of a record $4.3 trillion in U.S. corporate debt (lower-quality corporate loans and high-yield bonds) and the $19.5 trillion in global corporate debt will start to set in which means corporations would do well to broaden their funding mix. I envision the rest of 2019 and into 2020 will be the time for companies to mitigate the potential long-term risks and challenges associated with uncertainty — creating shifts that will have a big impact in 2020 and 2021. We’re already halfway through 2019, so there’s not much time left to make an impact.
As we all know, the economy’s health is cyclical. In my opinion, if companies don’t get aggressive in how they manage their working capital and mitigate challenges associated with free cash flow in 2019, it will be to the detriment of the global economy in 2020 and 2021.