Addressing the Post-Crisis Challenges in Working Capital Management
International Journal of Research in Management, Vol. 6, No. 2, November 2012
12 Pages Posted: 1 Jan 2013
Date Written: October 5, 2012
In response to difficulties in obtaining traditional bank credit, it appears that collaborative financing tools, such as supply chain finance (SCF), are generating significant interest as a way of freeing up working capital for firms. When they are employed effectively, the SCF can help manage risk, optimize working capital and cash flow, and also improve the flow of transaction data between trade counterparties without a need for costly implementation processes. SCF programmes are increasing in popularity especially in the EU-27 member countries, these programmes often involve asset-based structures where the key asset is outstanding invoice debt owed to smaller suppliers by a large, highly rated buyer company. The SCF schemes are usually arranged between the bank and the large buyer, then offered to participants in the supply chain.
There are lessons to be learned from the credit crisis for all involved parties. The companies understand the importance of having multiple funding sources to provide protection in an economic downturn, and concern on credit quality and security for their investments more than before. There is also an opportunity for financial institutions to thrive especially in the SCF market. Without question SCF programs have proven their value as a financing tool for buyers and suppliers looking to improve working capital and build collaborative relationships. Considering investment risk, over the credit crisis, flight to quality was and still is dominant among corporate investors, with big and stable banks with a strong balance sheet benefiting from higher levels of investment. Linked closely to counterparty risk, treasurers should be continually seeking to understand the banks in which they are investing more fully, not only in financial terms but also in the quality of the investment process and where the banks are placing their funds.
Keywords: working capital, cash management, liquidity management, supply chain finance, investment approach, small and medium enterprise
JEL Classification: G32
Suggested Citation: Suggested Citation