SGS Maine Pointe's Dan Ginsberg on how firms can tackle cash challenges

Dan Ginsberg, a managing director at supply chain consultancy SGS Maine Pointe, in a recent Global Finance article commented on how companies can better manage cash flow in a high-interest environment.

American banks and businesses have grown accustomed to consistent near-zero-percent interest rates since the 2008 financial crisis. When interest rates were ratcheted up to combat runaway inflation, that pulled the rug out from under mismanaged financial institutions with business models predicated on the unending flow of cheap money. Silicon Valley Bank and Signature Bank collapsed and were subsequently bailed out with taxpayer dollars to restore confidence in financial markets.

With higher interest rates expected to remain in place until inflation reaches its target of 2%, companies will have to grapple with higher cost and lower availability of credit. For some companies that will mean bankruptcy, while healthier firms will cut down on M&A investments and modify their management of working capital.

“Working capital is all about maintaining an appropriate level of cash available for day-to-day needs as well as managing the funds to invest in your business for tomorrow,” Ginsberg told Global Finance, a magazine for corporate financial professionals. “When financing is cheap and widely available, you tend to not worry or analyze your liquidity needs or future investment requirements, as you are flush with cash. As interest rates increase, the ability of CFOs to really manage that account, and have enough money for day-to-day needs and future needs, is under a lot of stress.”

Inventory is typically the largest pool of stored cash value, Ginsberg says, and many companies have built up excess inventory over the last couple of years due to the pandemic and supply chain uncertainties. Now, firms are looking to move excess inventory from warehouses, often at a discount.

“There may be opportunities to break even, but time is your enemy,” he said. “The sooner companies move on to those strategies, the higher the probabilities that they’re going to be able to avoid a significant loss.”

In a recent client engagement, SGS Maine Pointe helped a consumer goods designer offload slow-moving inventory to a channel provider in South America – recovering 85% of full retail value.

Accelerating receivables is another way to free up cash – and if done properly, can also improve perceptions of customer service. Ginsberg notes that most disputes aren’t actually disputes, but clarification queries that can be resolved with self-service portals or phone interactions instead of outsourced collections agents. Automating the resolution process can help speed up payments while delivering a better customer experience.

Payables are another cash flow opportunity, since companies can try to retain cash for longer by extending payment terms. At the same time, the price of raw materials has declined in recent months, meaning companies can try to renegotiate with suppliers for better prices.

“But it’s hard to get a better price when you’re also asking for an extension of the payment terms,” Ginsberg said, “and therein lies your challenge in balancing your liquidity with your costs.”