The change is evident regionally in the growth of intra-regional trade and the broadening of manufacturing bases and locations. Globally, it is being felt through diversification of the supply chain. Increasingly the shift is being observed at the corporate level, where working capital strategies have had to adapt to these trends.
Working capital management is already a fundamental of sophisticated treasury management and its role will further increase. This is particularly true in emerging and developing markets, such as those of Asia Pacific. Given that trade and financing are intimately linked, it is not surprising that the application of non-traditional and innovative working capital strategies continues to gain traction in the region. Since the 2008-09 global financial crisis, it has become increasingly difficult for many corporations to access the equity and bond markets, while the pricing of external financing has often become less attractive. Consequently, alternatives to bank facilities for financing working capital are becoming an integral part of contemporary corporate culture.
As a result, many of Asia Pacific’s treasurers have responded by driving a convergence of various credit functions to better harness working capital opportunities. They have partnered with their global sales team and its procurement expertise, to gain greater influence and control over their organisations’ working capital strategies. Technological innovation has also been leveraged to achieve greater efficiency in their payments and collections, both at local or regional level. Numerous other actions have also been taken, so collectively the bar has definitely been raised.
At the same time, there has been a shift towards focusing on the fundamentals of working capital to gain maximum effectiveness. Let’s examine this development more closely.
Back to basics
Firstly, accounts payable (A/P) is a logical starting point for enhancing working capital strategy. From a working capital management perspective, the goal is to increase days payable outstanding (DPO) by extending the time taken to pay suppliers. Many companies also seek to optimise their own working capital, by getting paid sooner to reduce their days sales outstanding (DSO).
In our experience, supply chain finance (SCF) programmes often present a workable solution to these conflicting goals. Payments arrive at a confluence using SCF programmes, where the buyer asks his bank to finance suppliers’ receivables based on the buyer’s own – and often stronger – credit profile. This structure also enables the buyer to extend his payment terms, thereby boosting his own DPO. Elsewhere, technology is playing a major role in pushing the boundaries of A/P within the supply chain. Card solutions are also increasingly playing a role in the travel and expenses (T&E) space, as e-payables make the transition from niche to sophisticated working capital solutions, and clearly indicate the direction in which the payables space is evolving.
Secondly, accounts receivable (A/R) is a major area of focus for Asia Pacific companies and plays a transitional role in further developing a wider working capital management environment. We’re seeing that control over this area is typically held by a company’s sales team and/or credit function, which is responsible for determining whether or not credit can be extended to specific counterparties. Times are changing though and in our interactions companies are gradually adjusting the way in which these decisions are taken. Treasurers have begun to get directly involved in the dialogue as companies seek to achieve greater visibility and control across their A/Rs.
Thirdly, inventory is playing a more prominent role in working capital. Encouragingly, programmes are also taking a local flavour: in Australia, for example, borrowing-based financing structures have been adopted widely. These structures have gained popularity, typically where companies are looking to create a level of liquidity as they bring relatively homogenous goods – such as grain or metals – into warehouses. We expect this area of working capital management to gain in prominence, especially as SCF programmes, more broadly, continue to gain traction in Asia Pacific.
Although SCF is not yet as prevalent in Asia Pacific as in Europe and North American markets, its rapid growth is a formality. Consequently, with fewer programmes and less supplier awareness, corporations have less opportunity to flex working capital dynamics such as extending supplier payment terms. This will inevitably change as corporations headquartered in Asia Pacific align their treasury and financial supply chain management activities more closely with their foreign peers, and foreign multinationals leverage the financial supply chain solutions they have already used successfully in other regions.
As a result, several local solutions have been developed, which can support the needs of buyers and suppliers across the trade spectrum. In India, for example, domestic rupee (INR) bills discounting is the traditional physical solution, which is now evolving into electronic, invoice-based SCF.
In China, on the other hand, there is a mature market for bank acceptance drafts. These are effectively promissory notes: when A sells to B and B asks his bank to accept the draft on his behalf, the resulting instrument can be used and traded by A. In recent years, the People’s Bank of China (PBoC) has also launched the electronic commercial draft system (ECDS), which enables drafts to be sent and received electronically. The advantage this brings is that the new system is more efficient than the paper-based one that it replaces and significantly reduces the risk of fraud.
Regional variations mean that some companies will have a variety of programmes in place across different markets. Companies with deep local market requirements in China, for example, can work closely with the ECDS. Other companies may aim to create a programme that covers the entire region and establish a regional hub in one of the countries with more open exchange controls, such as Australia or Singapore. Companies with a fully international footprint might aim to set up global programmes in order to support suppliers from Europe, the Middle East and Asia Pacific. The chosen approach will depend very much on the specific needs and geographical presence of the company.
Local and regional approaches are not mutually exclusive. A company might have specific in-country needs, which can be met using local programmes. However, that same company might also create an Asia Pacific hub in order to adopt a more regional approach for other countries.
As SCF has become more mainstream, technical innovation has inevitably helped spread its influence. In addition to government-mandated systems, such as China’s electronic drafts platform, banks are creating channels that enable clients to use SCF through their proprietary bank systems. Select banks are also working to make electronic the traditionally paper-based underlying documents associated with trade transactions, such as letters of credit (LCs). Certain third party external providers offer a range of services, which can support companies in the preparation of documents.
In addition to technology and new processes, banks can not only help clients to access new markets in a seamless and increasingly efficient manner but also to better mitigate risk. Working closely with key clients and leveraging relationship and expertise in this space, they help institute controls and manage counterparty, documentation and operations risk better.
As the dynamics of Asia Pacific trade diversify geographically, are facilitated by different financing routes and rely on best practices and heightened innovation for success, it is incumbent on global banks to partner with clients and incubate growth aspirations. This they can do by offering customised and integrated solutions which are delivered to exceptional standards across the globe. These will be become the new normal, as the rapidly-evolving Asia Pacific trade space further takes shape.
Kuresh Sarjan, based in Hong Kong, heads the Asia Pacific Global Trade & Supply Chain Finance line of business, which is an integral part of Global Transaction Services (GTS). Kuresh provides strategic direction, owns the P&L and executes on the GTS Trade Finance mandate with a team of Trade Product Leaders and Sales Specialists located across the APAC region. His responsibilities extend to oversight on Operations, Counterparty and Enterprise Risk Management functions for this business. Over a 19-year career with the firm, Kuresh has served in leadership roles in Corporate Banking & Investment Banking (GCIB) spanning Client coverage, Global Treasury Services and Trade Finance. Kuresh holds a Masters in Management (MBA) and is an Engineering graduate (BE Mechanical). He has hosted a number of client events and writes extensively on the subject of Global Trade. Kuresh serves as the Co-Chair of BAFT Asian Trade Finance Committee and was previously Co-Chair of the Financial Services Committee of AMCHAM HK.
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