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CredAble has announced the release of its latest whitepaper, “The Business Value of Working Capital Financing: A Working Capital Guide for the Corporate Treasurer.”

This whitepaper explores the essential concept of working capital, its role in the corporate environment, and the economic dynamics affecting working capital needs, focusing on treasury-specific issues and showing how strategic working capital solutions can deliver significant financial benefits, affecting both profit and loss.

The whitepaper presents important discoveries, such as the possibility of achieving a 6.8% increase in return on assets through effective cash flow management. It also examines the effects of escalating inflation, expected to reach 6%, and rising interest rates, currently at 6.5%, on working capital needs—emphasising a 20% increase in the interest service coverage ratio among listed companies recently. 

Moreover, the report underscores how a software-driven Cash Management System (CMS) can enhance cash flows by 10%.

Ram Kewalramani, Co-founder & Managing Director, CredAble, said, “The effective management of working capital is crucial for businesses, especially in today’s asset-light and uncertain economic environment. Our whitepaper provides corporate treasurers with the knowledge and tools they need to navigate these challenges and optimise their working capital strategies for sustained financial success.”

Key discoveries from the whitepaper:

Economic challenges affecting working capital needs:

Inflationary pressure: Inflation is expected to increase to nearly 6%, within the Reserve Bank of India’s (RBI) acceptable range. Cost-push inflation, driven by a 35% increase in brent crude prices and a 75% increase in coal prices over three years, has notably raised operational costs across sectors.

Interest rates: The RBI has lifted the prime lending rate by 2.5% over a year, now at 6.5%. This rise has heightened borrowing costs for businesses, putting additional strain on their working capital.

The differential in yields between corporate and government bonds has decreased over the last three years, suggesting reduced market liquidity. The inclusion of Indian government bonds in the JP Morgan emerging debt index is likely to cause government bond yields to rise further, potentially diminishing market liquidity.

Treasury-specific challenges and responses:

  1. Cashflow management: Effective cash flow oversight is vital in a scenario where 82% of businesses risk insolvency due to extended financial hardships (SBA, 2021).
  1. Debt management and risk reduction: The report details tactics for effective debt management and financial risk mitigation amid climbing interest rates and economic uncertainty.
  1. Value addition through supply chain finance: Businesses focusing on cash flow management have seen a higher return on assets (6.8%). The report explores how supply chain finance can generate considerable financial value, influencing both profit and revenue and boosting overall financial health.
  1. Working capital optimisation techniques: CredAble’s innovative programs are showcased, illustrating how automated and comprehensive working capital management initiatives can assist businesses in maximising their financial resources. Real-life examples and case studies provide evidence of successful strategy implementations.
  1. Cash ratio comparison: Indian companies listed on the NSE have a cash ratio of 0.29 compared to 0.64 for companies on the S&P 500, underscoring liquidity variations between these markets.
  1. Effects of short-term debt: From FY22 to FY23, excessive short-term debt has notably affected companies, leading to heightened financial strain. Implementing a software-driven Cash Management System (CMS) can enhance cash flows by 10%.
  1. ISCR enhancement: A 20% increase in the Interest Service Coverage Ratio (ISCR) across listed service companies (excluding IT) and a 40% increase in ISCR across listed manufacturing companies demonstrate improved capacity to meet interest obligations due to enhanced working capital management.
  1. Working capital days and revenue: The white paper features a graph from the PwC Working Capital Study 2022-2023 depicting the inverse relationship between working capital days and revenue growth. Effective working capital management can lead to improved financial outcomes.
  1. Commercial paper yields: The document highlights a consistent rise in commercial paper yields over the past two years, reflecting increased costs for short-term corporate borrowing. This trend is likely to persist, influenced by the performance of sovereign bonds.