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Why 2019 is the Year for Companies to Address Working Capital Challenges to Avoid 2020 Crisis

01/04/2019 By

Spend Matters welcomes this guest post from PJ Bain, CEO of PrimeRevenue.

“Hello transformation. Meet reality.” Those four words sum up where the global business climate has taken us in 2018, and where it will lead in 2019. 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?

Let’s look back at 2018 for a moment. Despite macroeconomic trends such as interest rate increases, 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. The US economy is growing at an annual rate of 4.1%, the fastest pace in four years, and U.S. unemployment rate is below 4%. Global economic growth remains at 3.1% and general outlook is positive.

So, what will shape working capital challenges in 2019?

If 2018 was all about transformation, 2019 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:

  • Debt is getting more expensive. After being extremely low for the last 10 years, interest rates are going up for the foreseeable future. It’s time to diversify both short-term and long-term funding sources. In the U.S. and 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 will spread. 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.
  • The restructuring of key trade agreements. CPTPP and USMCA (formerly NAFTA) are just two international trade agreements that are on the table for ratification, renegotiation, restructuring or replacement in 2019. Companies will look 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. Mitigating these cost increases will be 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

Going into 2019, the reality of a record $4.3 trillion in U.S. corporate debt (lower-quality corporate loans and high-yield bonds), will start to set in, which means corporations would do well to broaden their funding mix. I envision 2019 as the year for companies to mitigate the potential long-term risks and challenges of 2018 — creating shifts that will have a big impact in 2020.

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.