Large Companies Shifting Focus to Preserving Liquidity and Managing Risks, Finds Study

Large companies around the world are responding to historic levels of market volatility and uncertainty by adopting an extremely conservative approach to working capital management, according to a study by the Royal Bank of Scotland (RBS) and Greenwich Associates.

“The most obvious evidence of this conservative stance has been the accumulation of large cash positions by multinational companies,” said Scott Barton, co-chief executive officer (CEO) RBS international banking. “However, companies’ build-up of liquidity is only one part of a multifaceted drive to on ensure adequate liquidity and manage risks.”

In a report issued today entitled, ‘Working Capital Management: Efficiency, Liquidity and Risk Avoidance’, RBS and Greenwich Associates document the strategies, products and providers companies are using to achieve these goals. At the top of companies’ lists of current priorities in working capital management are:

  • Maintaining liquidity: after living through the shut-down in global credit markets, companies are guarding against any future disruptions in funding.
  • Managing risk: companies are especially focused on counterparty risk among banks, suppliers and clients. They are also moving to guard against broader macroeconomic and other risks, and to reduce or even eliminate risk in cash investments.

By a wide margin, companies in North America and Asia name liquidity preservation as their top working capital concern; European companies name broader risk management concerns as their top working capital priority. To achieve their objectives, companies are employing a variety of strategies, products, and partners, all with the potential to improve efficiency and limit risk. In addition to accumulating sizable cash positions, companies are centralising treasury operations; integrating working capital functions such as trade finance, cash management and foreign exchange (FX); and automating liquidity management, collection processes and other key elements of working capital management.

Among the most important techniques used by these large companies to optimise working capital are minimising inventories, reducing days sales outstanding (DSO), lengthening payment terms with suppliers and taking advantage of supplier financing.

“Because of the significant benefits such steps can deliver in terms of operational and financial performance, RBS and Greenwich Associates expect working capital management improvement to remain a top strategic priority for companies around the world in the years to come,” said Barton.

Working Capital Management: A Strategic Imperative

The results of the RBS/Greenwich Associates study reveal a gradual but clear recognition on the part of large companies around the world of the value they can create by maximising efficiencies in this function. Approximately 72% of the companies participating in the study say they view working capital management as an important strategic component to their overall financial management processes, and 84% name working capital management as an integral part of their funding strategies.

With the function playing such a central role in corporate funding strategies, companies can be expected to continue their intensive drive to improve working capital management and to realise potentially significant benefits in terms of operational efficiency, risk management and overall financial performance.


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