Fighting the immediate impact of inflation on treasury
Treasury leaders discuss challenges and strategies to manage inflation’s impact on business operations.
Inflation has become a significant concern for businesses worldwide, impacting revenues, costs, and the overall financial stability of organisations. At EuroFinance’s 9th annual Global Treasury Americas West Coast, treasurers from on-site power generation company, Bloom energy, software giant Autodesk and Texas based engineering and construction firm, Fluor corporation shared their experiences and insights on how they’re navigating these inflationary challenges.
Inflation has manifested itself in various ways, affecting corporate earnings, interest rates, and foreign exchange rates. As the Federal Reserve continues to raise interest rates to fight inflation, companies are grappling with the high cost of debt financing and a strong US dollar.
“We believe inflation may come down a bit in the near future as commodity prices have dropped over the past months in general. However, many governments and central bankers are now at a crossroads. With so many countries having such high debt to GDP, a high inflation environment may help the government to lower its debt faster, but then it may backfire and hurt the overall economy. This is certainly a delicate situation, and it would be interesting to watch how they handle it.” Ronald Chan, CIO at the Hong Kong-based Chartwell Capital exclusively told EuroFinance
For businesses with significant offshore operations, the strengthening dollar presents material headwinds to revenues. Consider, Autodesk with about 65% of its revenue from outside the US, faced negative impact on its revenue as the US dollar strengthened during 2022.
“If you think about the impacts of inflation on corporations, it really manifests itself in three different areas: the first being the pressure on margins, thereby impacting corporate earnings. The second being interest rates as the Fed continues to raise interest rates to fight inflation, and the third is FX.” Elizabeth Kwong, VP Treasurer at Autodesk, discussed the challenges her company is facing due to inflation.
Effectively managing working capital
Furthermore, in the face of inflation, managing working capital effectively becomes critical for organisations to ensure that operations run smoothly and financial risks are minimised. Working capital, which is the difference between an organisation’s current assets and current liabilities, is a key indicator of short-term financial health and operational efficiency.
While talking to the delegates at the conference, treasurers emphasised the importance of a proactive approach to working capital management amidst inflationary pressures.
One way to manage working capital effectively is by focusing on optimal payment terms. This involves negotiating with procurement teams when renewing and entering new contracts. By extending payment terms where it makes sense, companies can improve their working capital position without compromising relationships with suppliers. As Kwong highlighted, it is essential to strike a balance and not jeopardise supplier relationships by pushing for unreasonable payment terms.
“We’re having those discussions with our procurement team, as they’re negotiating contract renewals as they’re entering into new contracts. And we’re taking a look at payment terms and extending those out where it makes sense.” Kwong further told delegates.
Treasury leaders also emphasised the importance of cross-functional collaboration and creativity in responding to inflationary challenges. By stepping outside conventional treasury roles and working closely with other departments such as supply chain or accounts receivable and payable, treasury professionals can help identify opportunities and solutions.
Arun Batra, treasurer at the California based- Bloom energy, highlighted the need for a broader outlook: “You have to keep your vision wide-ranging, you can’t keep your vision limited to the conventional Treasury fields, so if it means that, you’ve got to step out of bounds into the world of supply chain, AR/AP and don’t be afraid of that.”
In an inflationary environment, supply chain teams may want to buy in bulk to secure better pricing. However, this could have an adverse impact on cash and working capital. By collaborating with the supply chain team, treasury professionals can help find the right balance between inventory management and cash flow.
Another critical aspect is being creative in handling exposures. Rather than just buying a forward or option to hedge against foreign exchange exposure, treasurers can explore opportunities to create natural hedges. This approach can help organisations manage their working capital more effectively while also reducing the cost of hedging.
Moreover, Todd Yoder, Director of Global Treasury at Fluor Corporation, emphasised the importance of getting “down in the trenches” and collaborating with business teams to identify exposures and understand suppliers. By building relationships across multiple layers of suppliers, treasurers can uncover opportunities to manage risk more efficiently and lower costs. By understanding suppliers’ needs, treasury teams can also help prevent disruptions in the supply chain, which can have a significant impact on working capital. Yoder emphasised that having an effective tech stack allowing data to be leveraged is very important to achieve optimal results.
Furthermore, Kwong also discussed the use of external receivables and payment financing as an option when internal efforts have been exhausted. However, she stressed that this should be considered a secondary step, with the primary focus being on internal management and optimization of payment terms.
Inflation presents significant challenges, but treasury leaders are stepping up to the plate by adopting creative strategies and leveraging cross-functional collaboration. The panel discussion highlighted the importance of proactively managing working capital, staying flexible in the face of changing market conditions, and fostering strong relationships with external partners like banks and other financial institutions.
The world’s largest and most influential treasury event will return this September in Barcelona. Join more than 2000 senior-level professionals representing over from more than 50 countries to exchange experiences, learn best practices and meet best-in-class financial and technological partners. This year we will explore the theme “Navigating a new world,” empowering treasurers to manage today’s new and complex challenges and optimise treasury for the new economic cycle. Find out more.