Since 24 June 2016, the day when the results of “Brexit” referendum were made public, debate has been raging on the implications of the United Kingdom’s exit from the EU for the policies, economy and finance of the Old Continent of Europe. Aside from this, a report published by Lloyds Banking Group in spring 2017 also puts the spotlight on how Brexit is affecting net operating working capital, by which we mean the financial resources that companies need to fund their current operations, consisting of a key potential market for Supply Chain Finance solutions.
Lloyd’s report uses the Working Capital Index to calculate the pressure businesses operating in the UK are under to increase or decrease working capital. What do the data published by Lloyds reveal? Index readings of more than 100 indicate pressure to devote more cash to working capital. The current reading is 104.1, higher than pre-Brexit values. Why has there been this growth in net operating working capital over recent months? The first factor showing substantial impact relates to trade receivables. These receivables have gone up considerably since Brexit, because the time taken to be paid by clients has lengthened. The second factor highly affected is inventory. In early 2016, companies began building up inventory at a very fast rate to cover their entire yearly need, due to the worrying prospect of increasing prices. The report did not find, however, that these same companies were applying worsening payment terms for their suppliers, possibly because they were keen to retain the same terms for their smaller suppliers or because of the EU requirements for stricter control over payment times.
As often happens, these values show that smaller firms are more severely affected, with an index reading of 107.9, compared to an average of 101.4 for larger companies.
What should be read from these data? Obviously, it is premature to make any long-term predictions, since the effects of Brexit are still far from being unveiled. We cannot help noting, however, that financial indicators more closely linked to the real economy are starting to show the first signs of the direction we are moving in, and are representing expectations and concerns linked to Brexit, even for businesses that operate on British soil. Capital is seen to be used more efficiently, in view of a more sustainable Supply Chain Finance management. In this climate, Supply Chain Finance solutions can take on a key role in keeping these values under control, to avoid worsening performance having any domino effect along the entire chain. The second point worth mentioning is the role played by small and medium-sized companies in the economy. All too often, being the players having less sway, they pay a high price for the negative effects of what can be rather unrestrained policies. It follows that, even for Supply Chain Finance, larger companies should try and optimise working capital management of the entire chain, and so support the weaker nodes within it. A final aspect to consider, and one that produces more questions than answers, is the domino effect. Is what we are seeing in the UK market an isolated episode or the first indication of newly increasing operating working capital across the world?
Antonella Moretto and Federico Caniato, Directors Supply Chain Finance Observatory