While the Australian economy had a strong start to the year, the lowest unemployment in nearly 50 years, global inflation, labour shortages and supply chain issues have put significant pressure on businesses across a variety of industries.
After several years of record-low interest rates and operations that assumed and relied upon access to cheap cash flow lending, working capital has become a boardroom conversation.
CommBank data1 shows some interesting trends that illustrate how business struggles. There has been an increase in the amount of time that businesses are having to hold onto inventory before selling it – now averaging four months, up from about two months in 2020. Longer timeframes are a net negative for businesses because inventory must be purchased earlier – and therefore held for longer – before it can be sold for a profit. It’s a shift away from the pre-pandemic ‘just-in-time’ model, when businesses tended to hold only enough inventory to satisfy short-term requirements.
It’s also taking longer to convert sales to cash. Two years ago, in manufacturing CommBank saw a cash conversion cycle taking 55 days. CommBank customer data1 now suggests that it has increased to more than 100 days.
Supply chain issues mean that businesses are needing to buy stock earlier than anticipated because of concerns that they will not be able to source it later. “Clients are having to move away from the once-loved, just-in-time inventory model,” says Elizabeth Huxley, CommBank’s General Manager Working Capital.
Suppliers are also requesting earlier payments to remain within credit insurance limits, which is leading to an increase in requests for working capital finance.2
Different states, different experiences
Experiences across states have varied, due in part to their diversity of their industries.
In Victoria, CommBank data1 sees that manufacturers with access to inventory haven’t been affected as significantly as those that have to rely on global supply chains. Broadly, manufacturer’s inventory days at the start of COVID have retracted whilst more recent trends have suggested longer stock holding periods to accommodate disrupted supply chains.
In short, manufacturers are buying stock earlier in order to ensure that they’re able to access it when they need it. This is an additional expense not just for the material but also for storage.
In WA, seasonality in agriculture is responsible for peaks and troughs, which isn’t generally evidenced in June 30 financials but has a knock-on effect for many different businesses.
Domestically, the agricultural supply chain has lengthened by 4-6 weeks over the last 12 months, an increase from just 57 days to more than three months. This causes obvious concerns for producers of perishable goods but is causing challenges across the broader delivery system. Clients involved in container-centric products continue to experience difficulties in sourcing a consistent supply of containers, logistics to port and a shipping line that will not only present a ship but that will sail as per the destination port schedule.
Delays in processing at ports are causing challenges for industries that rely on transported goods. Those that have the means diverting traditional containerised products such as cotton into bulk single destination cargoes, which are then distributed from a secondary hub.
The transportation and services industries are experiencing significant increases to their creditor terms, which is creating a notable downstream impact. Cash flow is reduced and businesses are taking on management of their own capital requirements.
Expectations for the future
Inflation continues to rise despite the efforts of central banks to rein it in. In the US, the August 2022 Consumer Price Index Summary was reported at 8.3 percent, an increase of 0.1 from July.3 Australian inflation is faring better though still high, at 6.1 percent for the quarter ending June 2022.4 The target rate is somewhere between 2-3 percent. The high rate may mean more actions in the future, which is additional uncertainty for those requiring business finance.
As the RBA and US Federal Reserve increase the cash rate to help pull back on inflation, the cost of borrowing will go up significantly. It is going to be more expensive to borrow money for the near future, which will add costs to businesses that need the additional working capital to buy and hold stocks earlier to ensure future access.
Those interest rate changes have had a negative impact on retail customers’ discretionary spending. This has led to higher stock holding, slower sales and an increase in working capital requirements.
There is good news for the future, however. CommBank data1 indicates that logistics should become less problematic as current high prices will elicit a supply response resulting in a return to more trend values which in turn may see midterm demand for trade funding to come under pressure.
While supply chains operations will remain tight for the next 12 months, here are four actions businesses can take to support their future:
- Adjusting operations
- Automating where possible
- Seeking new suppliers and business partners
- Reviewing working capital strategy to ensure it is fit for purpose
Adopting some of these actions will mean businesses are more resilient and in good position to be able to handle future disruptions.
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