The Covid-19 pandemic has changed the world in a way that few other historic events have equalled. One impact is that many companies need to pay increased attention to the financing and structure of their working capital.
Once-esteemed just-in-time thinking is being challenged. Companies, together with entire countries are prioritising security of supply and financing. Reductions in sales, interrupted supply chains and a lack of planning are significant triggers. At the time of publishing in early 2022, the global economy is facing a massive increase in raw materials prices as well as shortages of intermediate products. At the same time, geopolitical challenges have increased while, in addition, the net zero energy transition must be managed and its political implications resolved.
For corporate treasurers in Europe, supply chain disruptions remain the biggest challenges they face, according to a survey published in October 2021 by Economist Impact in cooperation with Deutsche Bank.
Addressing the question of how supply chains can become more resilient in the future is therefore becoming paramount. Alongside this is the need to rethink working capital financing. Going forward, corporates will need to balance the different objectives of operational stability from larger inventories, but at the cost of lower profitability.
To complicate matters further, it is not just the pandemic that is impacting supply chains. The global megatrend of sustainability is also fundamentally changing the way we work with suppliers. In the wake of the new German Supply Chain Act, companies will have to assume even greater responsibility for compliance with human rights and environmental standards in their supply chains. Investors, customers and employees are also increasing the pressure on companies to operate more sustainably. Financing solutions linked to key sustainability performance criteria can help incentivise companies and their suppliers to behave in a more ESG-compliant manner.
The second major megatrend that will shape working capital financing in the future is digitisation or the Internet of Things (IoT). There will soon be a time when customers will no longer have to buy machines or equipment but will be able to pay for actual capacity and asset utilisation. Such usage-based business models are gaining in popularity because they can help improve production through real-time utilisation data generated from the asset itself and this is much more efficient in terms of offsetting the depreciation cost from wear and tear of the asset.
Such models also allow the customer to make their cost base more flexible and adapt it to the sales of its end products. However, these business models also require new financing solutions, which companies and banks need to develop together. At the same time, digitalisation is ensuring that working capital financing is increasingly the focus of fintechs, which are entering the market with new product solutions and convenient platform offerings. This development will also call for new types of collaboration models in the future.
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