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Efficient capital management increasingly important

One neglected area within working capital with great potential is trade finance. Take control of the entire value chain to unlock savings, says Lars Millberg, head of SEB’s Transaction Banking business area.

Manufacturing companies increasingly sell their products in new markets outside traditional Western countries. A couple of years ago, exports from many manufacturing industries in the Nordic countries and Germany passed a tipping point when more than 50 per cent went to countries outside the OECD area.

“Increasing globalisation creates new growth opportunities, but it also leads to an increased complexity in areas such as warehousing, transportation, production and management of risks and cash flows from buyers in new markets,” says Erik Seifert, head of Working Capital and Liquidity Management within Transaction Banking at SEB in Sweden.

Corporate treasury units have historically worked with banks to trim their payment flows, liquidity management and internal processes as much as possible – all of it traditionally included in the cash management area.

“Recently, treasury units increased their focus on efficiency and proactivity in the area of trade finance, to ensure that they get paid for exports and how they, together with the marketing departments, can increase competitiveness and profitability in emerging markets,” says Lars Millberg.

“You don't send off 200 trucks to Vietnam along with an invoice. Instead you use letters of credit to reduce risk. However, the letter of credit may also be used as a cost-efficient instrument for customer financing. The value for the buyer in Vietnam to get a dollar or euro financing at 2-3 per cent interest rate tied to the purchased goods is enormous, as he or she would otherwise have to pay interest rates of about 15 per cent to borrow from local banks. That makes it an important issue when choosing a supplier.”

Long lead time

Working capital is a complex area that requires legal documents and statements from various parties. These must be reviewed and interpreted in relation to the international and local regulation, meaning lead times can be long.

SEB’s research shows that the average lead time from when the seller ships the goods until the company gets paid is 41 days. A more reasonable period would be around 12-20 days.

“Global competition is getting tougher and the cost of capital has become increasingly expensive after the financial crisis. There are great savings to be made for businesses, particularly in terms of working capital that can instead be used for customer financing,” Seifert says.