A Treasurers Guide to the Pandemic: Two Steps for Navigating a Recession

With liquidity in scarce supply, and supply chains suffering unparalleled disruption, UniCredit’s Adeline de Metz, Global Head of Working Capital Solutions and Raphael Barisaac, Global Head of Cash Management, suggest two steps treasurers can take to help navigate the current economic climate.

To ensure business continuity during the current economic downturn, corporates of all kinds are looking to optimise their cash management and working capital processes. This should involve a holistic approach and include two crucial steps: one, tighten cash management processes to unlock trapped liquidity; two, re-evaluate working capital strategy and extend liquidity to suppliers.  

Given today’s climate, however, it is not enough for corporates to merely shore up their treasury. Cash management and working capital processes must be digitised from end-to-end to ensure daily operations can be maintained seamlessly from any location – including a home office.  

If carried out successfully, this plan will help corporates establish a future-proof and streamlined treasury set up – capable of better absorbing economic shocks and shortages in liquidity.

Step one: Tighten cash management processes

To access liquidity, corporates are increasingly drawing on pre-existing revolving credit facilities (RCFs) to tide them over in the short term. Before this happens, however, measures can be taken to help unlock internal liquidity, and thereby minimise the amount (and therefore the cost) of borrowing.

UniCredit, for instance, has recently worked with Italian company Tecnica – a leading retailer of outdoor footwear and ski equipment – to give the Group Treasurer better oversight and faster access to liquidity.

Before this solution, the company’s liquidity was split over several subsidiary accounts across Tecnica’s sprawling sales and production network. While this gave local teams control over their finances, it was challenging for the Group treasurer to evaluate the company’s overall cash position with ease and allocate liquidity where necessary.

The solution to this was to redesign the client’s cash and liquidity management processes by implementing a complete payment factory and cash concentration solution. This meant rationalising Tecnica’s treasury structure to just two bank accounts per country, with daily international sweeps from local accounts (including those held with other banks) into the company master account held in Italy. Importantly, these accounts can now be managed through an e-banking portal – allowing the central treasury to easily check positions at any time and anywhere.

UniCredit’s Adeline de Metz, Global Head of Working Capital Solutions and Raphael Barisaac, Global Head of Cash Management.

Under this new system, Tecnica has been able to unlock internal liquidity and funnel it to the most impacted stores. If a branch is short on cash due to low collections, for example, Tecnica’s treasurer can easily reallocate funds from the central cash pool to tide it over. This has been key to softening the economic shock caused by the COVID-19 pandemic and reducing the need to lean on short-term lending facilities.

Step two: Re-evaluate working capital strategy and support suppliers

Once a corporate’s cash management processes are optimised, the challenge of default and delays in payments caused by the pandemic must be addressed. 

To combat this, corporates are increasingly in search of guaranteed, or quicker, payment, drawing on established working capital techniques such as receivables finance. By selling receivables, businesses can top up their liquidity as needed, while simultaneously guarding against the heightened risk of late payments and defaults. This can be critical, especially given the lack of visibility over clients’ financial stability.

Depending on a company’s unique situation, this can be carried out a number of ways, including factoring, which is straightforward and familiar to most; forfaiting, which is ideal for a small number of debtors with large amounts; and securitisation, which requires elaborate set-up, but is excellent for large and diversified portfolios of debtors.

The value of supply chain finance

Large buyers will also need to ensure access to liquidity is extended to suppliers, who are equally at risk of default and delays in payments, as well as declining revenues.

With this in mind, supply chain finance has become a key working capital tool during the pandemic, with many large corporates establishing or expanding programmes.

This technique is something numerous UniCredit clients have taken advantage of recently, with Italian retail store Esselunga, for example, extending financial support to its suppliers by expanding its pre-existing reverse factoring facility to EUR 530 m. This programme serves to accelerate payments to Esselunga’s suppliers – offering them liquidity in advance of invoice due dates.

“Large buyers will also need to ensure access to liquidity is extended to suppliers, who are equally at risk of default and delays in payments, as well as declining revenues.”

Other clients have also moved swiftly, too. PAM Group, for instance – an occupational health and wellbeing services provider – established a EUR 130 m envelope to extend support to its suppliers, while Conad, a retail store company, established EUR 750 m to provide its suppliers with access to capital ahead of the payment terms of their trade receivables.

However, the cost and effort for banks of onboarding the large number of smaller suppliers that typically make up the “long tail” can limit the application of reverse factoring. To overcome this issue, cash rich corporates often use dynamic discounting: a solution whereby buyers offer early payment to suppliers from their own cash reserves, in return for a scaled discount – the earlier the payment in advance of its due date, the greater the discount.

Digital solutions

Typically involving a significant number of small invoices, dynamic discounting is, however, a challenging process to manage, especially when working remotely.

Digital dynamic discounting platforms – such as the one offered by UniCredit, in partnership with FinDynamic – provide part of the answer. UniCredit, for its part, has already been able to support Venchi, the Italian chocolate and ice cream manufacturer, with FinDynamic’s mobile- and web-based tool, enabling the corporate to efficiently manage its invoices and early payments through an easy-to-use application.

Of course, this is not the only digital working capital solution available to treasurers today. UniCredit, recently announced it had built on its existing supply chain finance platform through a collaboration with San-Francisco-based fintech, Taulia, whose platform provides innovative, digital supply chain finance, and dynamic discounting solutions for buyers and suppliers.

These tools not only serve to extend critical support right the way down the supply chain, they also ensure key working capital processes are digitised for a seamless transition to remote working.

Navigating economic crises

The COVID-19 pandemic, and resulting economic crisis, has left corporates grappling with the challenge of ensuring business continuity while working remotely, accessing short-term liquidity, and supporting supply chains.

Thankfully, by following two simple steps, treasurers have the ability to not only weather today’s recession, but to shore up their business for future economic shocks, and digitise their architecture in the process.  

Sponsored By: