Jul 11 2011
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Mena firms focus on working capital management
Monday, Jul 11, 2011
Dubai In the post-financial crisis era, business organisations from the Middle East and North Africa (Mena) are getting more innovative about managing their cashflow and working capital, said Haytham Al Maayergi, Managing Director and Head of Transaction Banking, Standard Chartered UAE, in a recent interview with Gulf News
“Historically many organisations from the Mena region adopted short-term funding strategies or maintained excess operating balances as a mechanism to safeguard [against] cash flow uncertainty. The new trend is clearly on building strategies that bring treasury principles of optimising cash and enhanced forecasting, into the fin-ance functions,” said Al Maayergi.
Organisations are increasingly using efficient cash management practices and cash flow forecasting methods. In a recent series of workshops organised by Standard Chartered in Bahrain, Qatar and the UAE, treasury professionals across the region expressed the need for tools and techniques that help them better manage their working capital and cash conversion cycle.
“Corporate treasurers across the region now recognise the need for more efficient cash management. We expect more organisations to focus on improved receivables and collections management that create reconciliation efficiencies, the smarter use of available funds to optimise returns or minimise costs and the adoption of a ‘just in time’ funding mechanism to manage the payments cycle,” said Al Maayergi.
Credit as marketing tool
Top tier companies that are able to secure credit on favourable terms are now using it as a marketing tool. Many firms have extended the credit period for sales to support their buyers. This has occurred even though overseas suppliers are shortening the credit tenure, creating a gap/disruption in the cash flow cycle.
This is being managed through increased use of short term facilities to bridge the gap in cash flow.
In many sectors that rely on large volume and value of raw material shipments, due to the uncertain nature of the shipping cycle and/or the commodity price, there are times when an unplanned and sudden large value payment is necessary.
These organisations need to maintain adequate liquidity to meet such obligations when they arise.
Al Maayergi said recent interactions with firms in the region suggests that while short term funding options may not provide enough cash to meet such obligations, a portfolio based receivables approach is the preferred option to fund working capital associated with large ticket transactions that do not follow a particular time-cycle.
In the recent years there has been a significant deterioration in counterparty confidence on supply. Most organisations, traditionally working on open account terms, are now using bank guarantees, letters of credit and pre-signed cheques to secure their payments. Generally, these models are adopted with higher credit terms, slowing down cash flow.
This model has worked well with counterparties in Asia, Africa and the Middle East, while trade with counterparties in Europe and the US continues on Open Account terms. While companies need to expand their business they are also faced with increased counterparty risks.
“Increasingly a majority of organisations from the region want to ensure timely payments and are exploring just in time funding mechanisms associated with their payments. Such mechanisms ensure that borrowing is only for time critical payments while cash inflows support the remainder of their payments needs,” said Al Maayergi.
By Babu Das Augustine?Deputy Business Editor
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