Roundtable – Working Capital in the Face of a Financial Crisis

At the Working Capital Management Forum 2008, held in London on October 23-24 at the height of the financial turmoil, we convened a roundtable debate to discuss the impact of the crisis on working capital practices – and on organizations in general. Attended by speakers and delegates to the conference, the debate was lively, wide-ranging and forthright, both painting a gloomy picture for many sectors and offering some suggestions for ways companies can limit at least some of the damage.

Attending were:

Simon Graham

Collection Sales


Annie Guerard

former Finance Director


Gavin Jones

VP, Treasury

Ahold Finance Group

Stephen North

Senior Procurement Manager

Royal Mail

Stuart Reynolds

Project Manager


Brian Shanahan

Project Director


Q: Will the credit crunch and consequent recession lead to a fundamental rethinking of how to manage working capital – or is it more a question of doing the same things better?

Brian Shanahan: I’ve got some very strong views on that. There is an element, certainly, where some very simple things just need to be done well, and that was always the case, and that’s not changed. What’s changed is the urgency. Look at the classic case: “if it’s not on the first seven priorities of a business, it doesn’t get done”. You’re going to find that for a lot of businesses, working capital may always have been an issue to some extent, but it’s never been a priority; therefore nothing’s ever been done about it. That’s going to change. Why? Because margin pressures will continually increase; if you look at anybody who’s in the public sector, capital investment is going to become very difficult; for everyone in the commercial sector the idea that “I’ll just phone up the bank and get more money” has virtually stopped at the moment; anyone who’s got banking covenants that are in any way linked to asset valuations is going to be worrying himself sick right now, because December 31st is going to be the next time the covenants are going to get measured for most people. So we are seeing already in the marketplace people scrambling like lemmings looking for cash anyway they can.

But what it is going to do is refocus those businesses that did not have working capital as a priority over the last four or five years because of cheap money, to come back and say “we need to go and look at those simple, fundamental processes, those things that are intuitively right to do, and make sure we string it all together and actually do it better than we have done before”. We’re not just talking about supply chain and, specifically, purchasing, but also the bit about “where am I sourcing from? What are the lead times? What’s my investment in that working process that I’m now inventing?” And also on the customer side – because although there have been great improvements, not only in the UK but across all of Europe, in customer collections, it’s getting tougher out there. It really is getting tougher. And we’re going to see things getting worse before they get better.

Stephen North: What do you think the future is for some of the smaller businesses that we all deal with?

Annie Guerard: They will go down. I think Christmas is going to be a bloodbath. My experience is in retail; there are some business models that are based on cheap credit and because credit is going to be at a premium, those businesses – unless they change their business model – will not survive, because now the banks will have to rethink the way they operate. For example, a furniture company that only sells at sale time every four months, offering credit lines like “buy now, pay in 2010” will vanish because that’s not a business model that works – not that it was never working before, but money was cheap…

Brian Shanahan: A company like this is actually a financing business more than a retailer, because if you walk in there you can’t pick something up and say “I’ll have that today” – it’s all six to eight weeks. They’re make-to-order; they do so many things that are absolutely spot on, but actually they’re a financing business. It’s finance arbitrage.

Annie Guerard: We need to go back to basics; every company needs to find the right basic model where debtors should be on average, say, 45 days, and you can cope with suppliers if they’re between brackets – you have to have brackets as opposed to one guideline of KPIs. As people develop their business model, they need to develop their cashflow model – as in “this is what we need to do to survive” – and have a buffer. Now that takes finance people, not just an entrepreneur. I think this is raising a different type of finance animal to work in cooperation with the entrepreneurs.

Brian Shanahan: It’s requiring people who have a much more holistic knowledge of business than just the functional aspects.

Simon Graham: I was going to say with regards to the recapitalisation of the banks, the UK government have stipulated that they want the banks to make it easier and revert back to the lending policies of two or three years ago. Do you think that’s actually going to materialise?

Gavin Jones: Certainly not before the year-end. When you speak with the banks – and I do on a daily basis – they are so focused on their balance sheets for their year-end position, I can’t see – whatever pressure from either the UK or other government bodies across Europe, or in the US – that they’re going to want to kickstart their lending, particularly back to, say, the 2007 levels as has been suggested here in the UK. They’re just not going to want to do it. And you generally find that at quarter-end – or even in some cases at month-end – that banks don’t want to lend unless they have to over their reporting periods.

Brian Shanahan: The key thing for year-end this time is their lending ratios. Most of them are going to bust the hell out of them all, so they’re very heavily retrenching, basically making emergency repairs to their balance sheets. When you look at the drop in share prices, this is largely being driven by hedge funds at the moment who are desperately trying to make margin calls and that’s why they’re selling everything. Everything. Just for short-term cash. It’s panic.

Gavin Jones: Certainly when I speak to banks they look at the statements that have been made about returning lending to 2007 levels and they’re saying “it’s going to take time for us to do that; it’s not going to be an overnight thing. Just because we’ve got money from the government, doesn’t necessarily free up balance sheets.” It’s also a mindset now within banks; some of them have been badly burned – largely because of some of their own poor risk-management decisions – and it’s almost a complete swing to the other way now, becoming totally conservative.

Stephen North: Do you think that across all organisations against this background that there will be more pressure put on procurement within each organisation to make savings and to help the organisation work more efficiently – almost becoming commercial problem-solvers?

Brian Shanahan: My own opinion? I think the knee-jerk reaction is “what can I do to cut costs?” whether it be through procurement, headcount; that is always the knee-jerk reaction of today’s generation of business leaders, and unfortunately in the particular environment we’re in right now that is really just putting a small dent in the car.

Annie Guerard: And it’s not the solution.

Brian Shanahan: It’s not the solution at all.

Annie Guerard: When our business started to decline in terms of sales there was great pressure on me to find cost savings. Now, you have some cost savings that take a long time to materialise because it’s about business reengineering, and process reengineering. You can’t deliver them in the short-term like your boss is pressurising you to do. So what do you do? You go to your suppliers. Which again is not the solution. Also, if you start cutting headcount, you create a global problem of more unemployment, and raising taxes and so on. What we’re going into now will be a macroeconomic situation of less people working, with less resources, having to deliver to unreasonable targets, to fund the unemployed. At a macro level this is quite scary. What we should be doing – without wanting to be Keynesian – is refuelling the economy and actually encouraging companies to become more lean but in a constructive way. There are always ways to achieve cost-savings.

Brian Shanahan: I think that’s already happening. Governments worldwide – including, let’s face it, the neo-conservative government in the US – is just throwing money at this in the billions. And what I would predict over a 12-to-24-month period is that you’ll see the toxic debt that’s sitting out there amongst many of the institutions’ hedge fund slowly transferring into government debt. We’re going to see an enormous pile of government debt sitting out there in about two years’ time. It is Keynesian, and it is necessary, or the whole thing’s going to collapse.

But the follow-on from that – and to get back to working capital – what this is going to do long-term is drive up the cost of money, as more government bonds are issued – and this is one of the reasons why money has been cheap in recent years, because the biggest governments in the world, with the exception of the US, have been issuing very low levels of paper debt, historically. That’s going to change right around. The cost of money goes up; therefore there’s a simple mathematical equation between “do I take the cost-reduction or do I go after the cash?” Quite naturally the balance of that is going to change, and it’s going to change in favour of cash.

Q: Moving on: might there be opportunities emerging from the downturn – increased mandate for change programmes, greater flexibility and value-add on the part of outsourcing vendors, for example – and if so how can organisations best position themselves to take advantage of these opportunities?

Brian Shanahan: I know what I’m seeing: we’re a working capital consultancy, and we’ve never been busier in our history. Never. I’m seeing some of the strangest things I’ve ever seen; I’m seeing industries like pharmaceuticals – where companies famously don’t care about working capital because they make so much money – these guys are focusing so hard now. Not just one of them: all of them. We’re looking at industries where they have huge cashflow deficits caused by asset-valuation drops, pension-fund requirements. This year-end is going to be huge – not just in terms of banking ratios, but for companies with pension funds with, now, the accounting standards that are there: these companies are going to be reporting huge shortfalls in pension-fund assets. It’s going to be a massive, massive problem…

But I would predict that once they get past the year-end – and there’s going to be some very, very painful bruising in the New Year when people have to report whatever it is they’ve got to report – then that will be the time when the dust settles and a lot of people will be out there saying “right: I’ve gone through the panic and I did the best I could; what am I going to have to do to make sure we never go through this again?” I think Quarter 1 2009 is a time when there’s going to be a lot of reflection going on, after the dust is settled. And it doesn’t matter what sector you’re in: even if you’re in a cash-rich public-sector business, the one thing you rely on government funding for is the capital investment.

Simon Graham: Is it over-panic?

Brian Shanahan: It’s a massive, massive overreaction.

Simon Graham: You don’t think it’s justified?

Brian Shanahan: Well, in some sectors it is. Take retail. I’ve just been working for a consumer electronics firm; I’ve just been in China. The way the cycle works is, their big customers in North America and Europe are placing their orders over the summer, with probably the last few orders coming in late August. They then go into manufacture in China, and they’re probably shipping already for Christmas. There are a number of major retailers out there – not in the foods market, but in the dry goods market – who are desperately trying to cancel orders at the moment. And these people aren’t at the high end, the Sony end of the consumer electronics market; they’re very much at the cheap end. But people aren’t just switching to cheaper alternatives; they’re stopping that kind of purchase altogether. You’re going to see some real blood on the floor.

Stephen North: From a retail perspective, this is going to be the absolute worst Christmas that retailers are going to have, without a doubt.

Annie Guerard: We saw it from 2003. We saw it in our brand. A slump in like-for-like. It was very difficult to convey to the group that when we looked at the fact we had ten years double-digit like-for-like and then started to fall into single-digits, you didn’t have to be an expert to see that there was a pattern. The problem with retail is that when you have this pattern you’ve stocked on an impetus of previous like-for-like. It’s not even your inventory: it’s your orders. It’s your forward commitments. You have an 18-month cycle in retail from conception to delivery in the shop, so you’re always 18 months behind in your ordering. This is how long it takes. But what the business is seeing is that you can’t commit to that long any more. You need to find a supply chain that allows you to have an offer to buy which instead of committing 90 per cent up front you commit 60 or 70 per cent and then the rest is repeats.

Brian Shanahan: The constraint has changed as well; especially in the electronics market it used to be that for your really cheap product you went to the Far East, with a long lead time, but cheap. Then if you had a fast need you had a secondary supplier somewhere like Hungary or Turkey, slightly more expensive but they can get it to you quicker. So you don’t make the same kind of margin, but you can top up: you’ve solved the old story that if it’s not on the shelf you can’t sell it. Now though big players have come into the market and they’ve driven the price down so much that there’s huge pressure not to use those secondary suppliers because the margin pressure is so hard that if you put the product made in Turkey, for example, on the shelf, you can’t possibly sell it – and this applies to fashion products as well – against products coming from Bangladesh or Burma.

Stephen North: Do you think though that the lower-end retailers will have a good Christmas because people will still be buying but spending less?

Annie Guerard: Yes, I think so.

Stuart Reynolds: Looking at the market at the moment, we’re trying to push from branded to non-branded – so Sainsbury’s own-brand. We believe that’s a really good move because you still get the quality but you save X per cent. There’s a lot of change in the way that we’re marketing.

Brian Shanahan: Going back to the original question about opportunities in the crisis: look at what Philip Green’s doing for example. There are opportunities here: the asset-valuation of companies is ridiculous. I could almost buy General Motors for $200 million. If you are an organisation with bundles and bundles of cash, and you don’t have these constraints – a minority of companies, but some of them – there are bargains to be had.

Stephen North: It’s like the housing market isn’t it?

Gavin Jones: Certainly in the US – we’re very fortunate because we sit on a large pile of cash as a result of a divestment programme from last year – we think there will be opportunities to take out individual stores from a competitor, or some of the smaller family-run operations that don’t have the same access to capital that they once did. But mostly it’ll be those like Philip Green who can profit; the credit for acquisitions that was there just isn’t going to be available now. It’ll either be share-based deals or cash deals for those organisations that have cash on their books.

Brian Shanahan: One of the things that’s very interesting at the moment is that if you look at the private equity market, they stopped buying stuff months and months ago, but if you look at the companies they have bought and taken private, often they’ve taken a company and split it up, and different organisations have taken different bits, and now as individual parts they don’t add up into sustainable companies because they don’t have full infrastructures. So they have to build a procurement function, build the finance function, get systems in, build or rent a head office, all that kind of stuff.

One of the things we’re seeing is that where once the private equity companies were getting their acquisitions to pay for this kind of investment themselves, now it’s the private equity companies paying directly for these improvements because of the capital constraints – capital for investment, working capital, margin pressure – all hitting at the same time. So the private equity guys are not only drained because they can’t get access to cash; the profits they’re built on they’re now spending on companies which there’s usually a three-in-four chance won’t make it from a profitability point of view.

Q: Let’s move away to a more back-office perspective. What about companies that don’t have these great cash reserves, that are going to have to sink or swim over the next year, two years; what opportunities might there be within those organisations for actions which can protect them?

Annie Guerard: Going back to basics.

Gavin Jones: I think any change programmes will have to demonstrate cost savings. You’re not going to get away with a soft business case; you’ll have to demonstrate the real hard benefit of doing any project. We’re very big on ROI; sometimes in a bricks-and-mortar retail business the ROI isn’t as good as it should be, and now we’re going through an exercise across the company really identifying store formats asking, are they really generating the right kind of sales per square foot for the kind of investment we’re making. Do we really need to move refrigeration from here to here because it’s going to cost us a million dollar to do that; can we just leave it where it is and design the store in a slightly different way? I think there will be opportunities – subject to the resources becoming available, but you’ll definitely have to show very real benefits.

Stephen North: I’m seeing that also; I’m right in the middle of demand planning for next year, and a lot of the stuff we want to do around systems involve benefits around being slicker, having a better process, and there isn’t a really strong case on ROI so that’s a really tough one to get through right now. Before, it was fine; not now.

Brian Shanahan: I would add to that – talking about those change programmes and the difficulty of showing those hard benefits – one of the things that’s already happening in the consultancy market is the vast majority of the big players are hurting badly right now, because the problem is they’ve spent years and years borrowing your watch to tell you the time… But certainly in the consultancy market unless you’re able to show a real hard ROI it’s just not going to happen.

Stephen North: Fewer change programmes, less work for the big consultancies.

Annie Guerard: I’d like to bring in something that is very close to my heart. You are always under pressure to deliver profitability, higher ROI – which can be done, and there’s a very easy way you can do it: under-invest. You can get to a stage where you are showing great return on sales, and have a rocketing ROCE, but you’re under-investing in key things around systems and infrastructure. Often, profits go back to the shareholder, or go back into acquisition – but are never put back timely into the business where it’s most needed in the long term. So then when you most need it, there’s no access to the capital which can assist in stability in the long-term – and that’s why using KPIs can be so dangerous, because you get a tick and a bonus because you’ve hit x per cent ROI, but you haven’t indicated the actual solidity of the business.

Brian Shanahan: I think the opposite is also true in terms of KPIs; I use a phrase sometimes, “year-end heroics”. Everyone has their targets, be they sales targets, revenue targets, margin targets and increasingly working capital targets. But if I haven’t made the real change happen what am I going to do on December 15th? I’m just going to stop paying everybody. So the people at the top end of that cash chain will look ok, but a lot of people in the middle order are going to be hurt quite badly because those big monies that traditionally would have been used, for example, on Christmas Eve to pay salaries just aren’t there.

Annie Guerard: As well, there is often quarterly rent to be paid on the 23rd of December or thereabouts – at least in the UK. Christmas will be especially tough because if the like-for-like sales don’t hit the spot, people won’t be able to pay their rent. A big company went bust last year because it couldn’t renegotiate with its landlord to pay rent monthly up-front rather than quarterly, which would have eased their cashflow substantially. And that kind of change in business practice would be a very positive move the industry could make.

Gavin Jones: I think that highlights the point that there is going to have to be a change in mindset, in terms of if you’re a landlord of a retail outlet – or whatever it is – and accepting the fact that traditionally you’ve been paid upfront on a quarterly basis, and working with your tenant to renegotiate these terms, you’d rather move payment terms than have the store go dark because then you’re going to find it difficult to rent again especially in this climate. And particularly if that landlord has a group of properties in a particular location, one going dark – ie, closing – is not going to be good for footfall into the other properties. And the landlord’s need to pay off whatever financing he’s got for his properties leads us to the need for a change of mindset among the banks.

Source by Jamie Liddell


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