Amid economic volatility and geopolitical uncertainty, it’s more important than ever for organizations to plan carefully and optimize working capital. Organizations that quickly adapt to changes in supply chains, customer behavior, consumer spending and credit costs often benefit from opportunities that arise—and can recover faster from disruptions. 

If an economic slowdown occurs, organizations may face cash-flow related challenges, including:  

• Reduced customer demand to liquidate expanded inventories
• Difficulty collecting accounts receivable, which could impact liquidity and working capital
• Cyber threats that could impact cash flow and deposits 

Treasury plays a critical role in minimizing the impact of disruptions and can set up its organization for success. That starts with increasing the speed of cash flow by focusing on treasury fundamentals, including:

Instilling a cash mentality

Concentrating on the basics of treasury management is critical to sustaining operations and maintaining sound cash management practices. To identify the enterprise’s current needs and form a long-term operations strategy, treasury teams should:

• Work with the business to instill a cash mentality and ensure working capital strategies align with the organization’s current and anticipated needs and the dynamics of the economic cycle. For example, how will the business liquidate inventory in a downturn? How will the liquidation approach impact margins or trading terms? If the enterprise can’t sell inventory, how will that affect the organization’s liquidity?
• Work with banks, consultants and specialists to identify opportunities that promote liquidity generation and new processes that can augment sustainable financial performance. For example, treasury can work with banking to increase automation in receivables reconciliation and lower time in cash application.
• Implement and measure metrics across the organization to incentivize change and assess business performance. If the business wants to enhance liquidity, for example, it could assess specific key performance indicators (KPIs) against accounts receivable to collect receipts faster and better manage customer credit.

Getting a clear view of organizational liquidity

The more visibility treasury has, the better. Ideally, treasury will have full visibility into the organization’s bank accounts, cash balances, cash flows and funding needs by jurisdiction and legal entity. With full visibility, treasury can ensure the organization has enough liquidity on hand to support its operational needs. 

In reality, many treasury teams do not have this visibility for all financial information in real time. This impacts their ability to execute their obligations effectively, ensuring efficient funding of accounts and deploying cash for its best advantage. 

These teams can increase visibility by:

• Working within the organization to champion the importance of cash visibility
• Implementing technology with greater connectivity and data aggregation functionalities
• Using a well-defined cash positioning and forecasting approach and presenting it to management in an easy-to-understand format

Navigating rising interest rates

Organizations that have directly or indirectly increased inventories may not want to rely on external credit and its increased costs. Should customer demand soften, credit availability may be critical.

Freeing up internal liquidity

As this cost of credit rises, organizations can benefit from increasing access to their own funds as much possible, rather than acquiring outside debt. If the company goes this route, treasury may:

• Identify possible internal sources for previously trapped cash and consider leveraging internal or intercompany funding sources.
• Increase access to cash through cross-border pooling, investigate the options available to access jurisdictionally trapped cash, and consider intercompany netting. Tax and legal teams can help explain the implications of any structures and cash movements across jurisdictions and legal entities.
• Undertake a rationalization exercise reviewing the number of accounts and their counterparties. Simplifying account structures and consolidating counterparties can be a useful foundational step in implementing any cash structure.

If scope is more complicated, many organizations may look to increase efficiency by creating an in-house bank.

Scrutinizing external funding

Treasury can further maximize liquidity and working capital efficiency using a disciplined, two-part approach that examines the organization’s funding sources and needs. 

1. Carefully review the organization’s current external funding sources. If current arrangements won’t provide sufficient funds for future needs, for example, treasury may move quickly to extend existing lines to avoid delays. Many organizations across market segments may look to extend their existing lines or add ancillary facilities to provide access to liquidity in case of need. If credit lines aren’t necessary, treasury could unlock value by reducing fees incurred on unused or unnecessary lines of credit. 
2. Ensure counterparties meet the organization’s funding needs. This could include determining the best banks to work with based on what services and products the enterprise needs. Treasury may also re-evaluate country risk and review local subsidiary funding arrangements, as some jurisdictions facing funding tightening may prioritize local organizations.

Managing operations and inventory

Treasury can work with sales and operations to optimize working capital in several areas, including:

• Sales and purchasing relationships: Treasury can work with sales to provide insights that can help optimize the enterprise value of sales through negotiated sales terms, impacting metrics aligned with days sales outstanding. Similarly, a relationship with purchasing can help optimize the value of cash through negotiated purchase terms, influencing days payable outstanding metrics.  
• Inventory levels for stock and work in progress. Many organizations struggle to obtain supplies, which translates to lost sales. Working with the business to assess inventory levels can improve supply chain management, preserving the competitive advantage of supply and balancing working capital held as inventory. In a downturn, the cost of holding this inventory could be challenging. Amid high inflation, inventory purchases may need to be revalued. Decreased demand may also impact how quickly inventory can be converted into cash, putting pressure on forecasts and increasing reliance on potentially costly external funding. 
• Look to the supply chain to manage risk and unlock value. Treasury teams can evaluate risks through simulations that show the impact of disruptive events on strategic suppliers and customers. An organization can unlock supply chain funding for its counterparties by leveraging its own credit profile. Treasury can then work to reduce accounts receivable risk and improve business relationships.

The bottom line

With careful planning, strong relationships and a focus on core fundamentals, organizations can optimize liquidity needs and working capital to minimize the impact of unexpected, but not unplanned disruptions.

We're here to help

The J.P. Morgan Corporate Treasury Consulting team can help you and your organization evaluate its working capital strategies and find solutions that best fit your needs. 

_{PMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/CB-disclaimer for disclosures and disclaimers related to this content.}