“Following the challenges that emerged during Covid, global trade and its impact on supply chains has been in the headlines ever since and for good reason. Be it geopolitical challenges or supply chain disruptions, no longer do people assume that trade just ‘happens.’ The situation at hand has reinforced the need for access to capital as we help our clients solve challenges and support their business”
Chris Cox, Global Head of Trade and Working Capital Solutions, Treasury and Trade Solutions, Citi
“For our clients, being able to navigate the next normal rests on being able to rely on their working capital and liquidity management capabilities. As corporates assess what they need to plan for in the future, Citi TTS has been a reliable advisor in finding solutions that meet our clients evolving objectives.”
Shahmir Khaliq, Global Head of Treasury and Trade Solutions, Citi
Last year, Citi Treasury and Trade Solutions (TTS) in partnership with Citi GPS published Supply Chain Finance: The Complexities Multiple. In today’s landscape, that title remains true as ever. Continued high inflation, elevated interest rates, the failures of several regional banks in the US, including Silicon Valley Bank and Signature Bank as well as the sudden acquisition of Credit Suisse by UBS and a potentially slowing economy have presented global corporates with a series of new challenges.
To provide greater insight into the unique operating landscape corporates face, this publication is a continuation of our most recent report, Citi GPS Supply Chain Finance: Uncertainty in Global Supply Chains Is Going to Stay. This publication seeks to marry insights gathered through two surveys, one focused on small and medium enterprise (SME) suppliers produced by Citi Research and one done in partnership with East & Partners, a global business-to-business (B2B) financial markets research firm, focused on the world’s largest corporates, with insights from our local experts to provide an in depth look at some of the unique challenges and opportunities in each of the world’s regions.
After enduring vast physical supply chain disruption and confronting the ensuing financial supply chain effects which were exacerbated by rising costs and dwindling margins, corporates continue to rethink what resilience means to their organizations. The pandemic feels largely in the rearview as geopolitical concerns and uncertainty around the global economy have become the driving forces behind impacts to organizations’ working capital. This publication will share some best practices and solutions that companies may utilize to help meet their goals.
Many business models are transitioning. We combine data driven observations with insight from our local experts to offer best practices that can be incorporated in a path forward in operating in each of the world’s regions.
Global trade participants have endured varied challenges as of late but following best practices in working capital management can help corporates navigate the next normal with success.
Quantifying the Challenges
Central banks across the globe have implemented a range of measures to address persistently high inflation with several choosing to raise interest rates in an attempt to quell inflation.
After prolonged disruptions caused by Covid-19, much of the treasurer’s attention has shifted to managing through the complexities caused by the adverse effects of above target range inflation. Treasurers find themselves concerned with rising recessionary risks, contracting margins and the potential of supplier defaults.
82% eight in ten global corporates report customer credit profiles are weakening1
After extreme energy shocks to start 2022, energy prices have shown signs of stabilizing though remain above pre-pandemic levels2. And despite initial optimism for export growth in 2023 from survey respondents, global demand is showing signs of slowing as export volumes from China have shown a decrease in the beginning of the year3.
Best Practices for the Next Normal
Looking back over the last three years, corporates have had to endure a varied set of challenges. 66% of suppliers surveyed indicated that increased costs of goods sold and increased costs of raw materials were causing meaningful supply chain disruption4. Furthermore, as corporates become increasingly focused on their Scope 3 emissions, or emissions created by the activity of assets not own or controlled by the corporate itself, suppliers in all parts of the world are increasingly being asked of their environmental, social, and governance (ESG) practices. As a result, corporates have placed a premium on flexibility and having their working capital stack in order is an essential part of that.
Prudent working capital management is arguably the most important element for achieving growth in an uncertain operating environment. 94% of global corporates declare they must ease ingrained working capital constraints in order to position themselves to hit revenue targets5.
“With weighted average cost of capital increasing for corporates, habitual discipline as it pertains to working capital is paramount as there’s a newfound premium on being able to be agile with cash management in the current environment.” Steven Elms, Global Sales Head of Corporate, Commercial, and Public Sector, Treasury and Trade Solutions, Citi
When asked specifically how improved access to working capital finance would help stimulate growth, one in four CFOs and treasurers said it would help bridge cash flow needs impacted by delayed receivables collections (24%)6.
"Definitely seeing stress across our smaller supply partners and their ability to debt fund their operations. Not so much with our bigger partners but even there, some early signs around them giving up margin for quicker payment terms; bit of a balancing act for us given we want them to still be profitable and trading.” Corporate Treasurer, US2.0Bn, UAE Construction Materials Group
94% of global corporates confirm relieving working capital constraints would help stimulate revenue growth7
Responding to an Evolving Risk
As a bevy of shifts in monetary policy take hold to help clamp down on inflation, borrowers are increasingly facing a more challenging credit environment. In the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) published for April 2023 reported a “significant net shares of banks reported having tightened standards on C&I (Commercial and Industrial) loans to firms of all sizes.”
Similarly, the ECB’s April 2023 Euro Area Bank Lending Survey reported that “the pace of net tightening in credit standards remained at the highest level since the euro area sovereign debt crisis in 2011.”
One in two global corporates (48%) are grappling with trapped liquidity of between 20% to 40% in Days Payable Outstanding (DPO).