Liquidity management debate: One day at a time

JG, Dell Dell’s core business model was built on the foundation of attention to working capital management, specifically balancing what we call the ‘triangle’ of liquidity, profitability and growth. We view all three as equal legs to the same stool. We operate on a model of very low DSO [day sales outstanding]. We are one of the most efficient companies on the planet when it comes to managing inventories and DSI [days sales in inventory], and we also balance our supply chain by having a healthy DPO [days payable outstanding]. Throughout the credit crisis, we have basically been operating according to our long-standing principles.

However, we have made changes. One is that we have linked our executive compensation to a metric that we call cashflow contribution. This is a measure of the cash generation of a particular division or geography of the company. For example, sales people now don’t simply have to ask: ‘What are the margins that I am achieving on this deal?’ or ‘What is my sales growth with this customer?’, they also have to be concerned with: ‘Is the customer going to pay and when?’ This has elevated the importance of the treasury function as now the business front office comes to us and asks: ‘What can we do to improve our cashflow?’ rather than the other way around.

JL, J&W That is a big change isn’t it?

JG, Dell Yes – a change for the better. Since executive compensation is linked to this, it is a topic that is frequently raised to board level. Our senior executives participate in what we call working capital council meetings, where the divisional heads of finance and general managers are held to account not only on their P&Ls but also on their divisional balance sheets, their cash collection, their inventory management and so on.

BR, Deutsche The key is that this is now a C-level discussion. This is why the banks are focusing on it and why they have to provide a broad set of solutions. Of course, it also really helps us build those sticky relationships with a customer – it’s more strategic, it’s longer-term and it’s not just transactional.

PL, RBS We have noticed that there have been many more active intra-day conversations at that level. Previously, companies would put in a solution and then let it run. Now it is much more about continuously fine-tuning that solution and discussing performance management optimization.

JL, J&W And where can the banks actually help with overall working capital management?

BR, Deutsche Well, one key change is moving towards the corporate platforms. This is not so much about Swift. This is about being linked to such platforms as GXS or Global Supply Chain Finance [GSCF]. The corporates have built up some very effective and sophisticated platforms. So the smart banks’ attitudes are changing: instead of trying to attract the corporates to their platforms, we’ve realized we have to join the corporate platforms and provide solutions that help automate the supply-chain process, on both the buyer and the supplier side, rather than imposing bank platforms on the corporates.

TD, Barclays Exactly. It is not a proprietary relationship any longer. The banks now realize that they can play a role in the overall strategy of such global companies as Dell but that they need to support non-proprietary formats, to go with Swift and corporate access if that is the client’s strategy, and to realize that they can offer value in certain areas, in certain geographies, and they cannot in others. Banks also have to accept that they have to cooperate with one another, which is not something they have always done very well.

PL, RBS We find that we are getting much more deeply involved with clients, especially credit-challenged clients where you are with them on a day-to-day basis, helping them identify where liquidity is trapped on an intra-day basis and making it available to them in locations where they need it. And as the broader market has changed, as revolvers fund more slowly and later in the day, we have to adapt how we work with the clients on these platforms to make them work effectively. But the strategic watchwords are centralization, stabilization and then performance management.

PS, Petro-Canada We are an oil company, which means that we have a very standardized process when it comes to managing receivables, payables and our working capital. We do not diverge a huge amount from the industry norm. For instance, receivables from our oil and gas sales are payable 30 days after bill of lading and there is no negotiation. There is not much we can do there. We have been talking to various counterparties looking for different terms and have achieved them in two instances. However, this had more to do with our concerns about the credit quality of the counterparty than the overall working capital management strategy. Where I think we as an oil company still need to do a lot of work is on the payables side.

BR, Deutsche If I could perhaps add one thing on the strategy side, Jack, particularly given the type of environment we are in now. Supply-chain finance is not just about getting cheaper credit for suppliers, it is also helping buyers to extend their payment terms while at the same time enabling buyers to say to suppliers: ‘We want to build up our relationship with you and put in place solutions that help you in terms of providing another source of credit that is also potentially more cost-effective and automated and which then also helps us to create reliability in our supplies and strengthen our link with key suppliers.’