Implementing effective working capital optimization techniques can alleviate immediate liquidity pressures and help ensure that companies who excel in the practice are better positioned to shift their focus towards long-term growth.

“Working capital is, today, one of the main items under scrutiny by management,” said Mohamed Eid of AFP’s Middle East and Africa (MEA) Treasury Council. Members of the Council shared their experience of optimizing working capital in challenging times in a recent meeting.

The status of the economies of the Middle East and Northern Africa (MEA) is, according to an October 2023 report from the World Bank, not good. “Growth of the economies in the Middle East and North Africa (MENA) is expected to fall sharply this year. The region’s gross domestic product (GDP) is forecast to plummet to 1.9% in 2023 from 6% in 2022, due to oil production cuts amidst subdued oil prices, tight global financial conditions, and high inflation.”¹

How companies operating under these economic conditions manage their working capital is a challenge. Drilling down into the nuance covered by this broad subject matter, members discussed the complexities of managing the cash conversion cycle (CCC), the importance of synchronizing data in the forecasting process, and the role banks can play in helping small and mid-size companies to manage working capital.

Managing the Cash Conversion Cycle (CCC)

“When it comes to collection and payable techniques, a lot of it has come down to supplier relations, especially on the AP side,” said Tom Hunt, CTP, Director, Treasury Services and Payments for AFP. “Having a firm policy in place helps, but not all vendors are created equal. Balancing a mix of terms is a necessary challenge.”

Accounts Payable

Asked how she was managing subcontractors in this climate, Dr. Nireen Abden, who is operating out of Egypt, said, “We are paying them 50% in advance of payment from our clients, and the remainder is paid when paid — when the client pays us, we pay them.

“For other payments, if I have a hard time with our clients, I have a buffer: I can get the funds from the parent company or (regionally) a sister company. We are avoiding overdraft or bank loans due to the high cost. We cannot afford it.”

Regarding the unique challenges posed by foreign exchange allocation in emerging markets, Ahmad Makhlouf said, “It is driving our working capital now. This is true only of companies dependent on imports.”

According to the Institute of International Finance (IIF), Egypt “could be facing a $7 billion financing gap for the current fiscal year and a new significant devaluation.” The IIF predicts that the country’s real GDP growth will be 3.3% for FY2023/2024 due to “high inflation, foreign currency shortages, supply bottlenecks, and the ongoing conflict in Gaza,” all factors that will “limit private consumption and exports.”²

“It’s the same thing in Kenya right now — the cost of financing is so high!” said Eva Mideva. “The companies would lose money by allowing us to take an overdraft.”

Should suppliers take on more of the liability, give companies more time to pay rather than having the company rely on internal resources? “Borrowing should, ideally, be the last resort,” said Mideva. “You’ve tried everything else first — reduced inventory, pushed your credit days to the maximum, reduced your data days to the minimum, but you still need more.”

Inventory

“Inventory is the hardest component in the cash convergence cycle to manage,” said Eid.

This is a critical issue in the manufacturing sector. One innovative method Mideva is working toward is consignment stocking. “We are looking at consignment stocking,” said Mideva. “Consignment stocking some of the spare parts and packing the things we require in the manufacturing process, and working with procurement to bring some suppliers on board on consignment so we only pay them when we consume.”

Receivables

Equally as important as inventory in the CCC is the time required to collect receivables. One treasury professional explained that treasury depends on collection to keep the CCC running smoothly.

Synchronization of Data

In order to understand how the CCC is moving, forecasting is necessary. How do you handle that in this environment?

“We have a weekly cash review meeting,” said Mideva. “Everyone in payables and receivables reports what they are expecting, then we determine what we need to borrow or what better use we can make of the surplus. Because this is a manual process, it has not been very accurate, but we’re not able to rely on the ERP yet.”

“We built a bridge between outflow and inflow parties,” said Eid. “If procurement wants 500 billion Saudi riyal to pay for materials over the next six months, we need to understand how much money we will get from receivables generated by sales activity. Doing it this way, we avoid contradictory information.”

“Everything starts with sales for the forecasting,” said Makhlouf. “If they’re too conservative, it will distort everything — revenue, planning, production, cost elements and ultimately cash flow.

“To avoid this, we spend quality time with sales — all of us — putting together the plan for sales and any obstacles, e.g., sourcing materials. Everyone has input that could alter the sales targets. The whole organization puts their heads together to come up with a number we’re all convinced of. This is done monthly.”

Role of Banks in Working Capital Management

In Egypt, Makhlouf said they are witnessing the demise of a number of small suppliers due to their inability to manage, or pay for someone to manage, their working capital. He feels the answer lies with the country’s banks.

“Local suppliers wouldn’t be impacted by FX, but they need someone to help with working capital,” he said. “They are driven by profit only, and they don’t understand how this affects their cash and working capital cycle.

“Banks could lend their expertise to small and mid-size companies regarding how to handle working capital. Many small suppliers do not have the expertise, or the money to hire a treasury professional to do it.

“We are seeing small suppliers who are sourcing the components for bigger plans going bankrupt because they are not handling working capital properly. This is a big issue.”

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¹The World Bank. (2023 October 5). Sharp Deceleration Expected for Middle East and North Africa Economies in 2023 [Press release]. https://www.worldbank.org/en/news/press-release/2023/10/05/sharp-deceleration-expected-for-middle-east-and-north-africa-economies-in-2023

² Egypt Today Staff. (2023, December 17). Egypt’s financing gap for FY23/24 at $7B, Institute of International Finance. Egypt Today. https://www.egypttoday.com/Article/3/129215/Egypt%E2%80%99s-financing-gap-for-FY23-24-at-7B-Institute-of