THE BIG SQUEEZE
Asia’s top public companies are getting better at managing their cash. But our survey suggests there is still a half a trillion dollars unnecessarily tied up in working capital.
By Cesar Bacani

In a country where consumers still insist on inspecting paper bills and paying with cash or check, India’s Bharti Airtel has constructed a receivables system that might horrify a telecom CFO in Hong Kong or Singapore. Bharti, a leading mobile phone operator with 44.7m customers, operates multiple channels for consumer payments, which comprise the bulk of its receivables. In the state of Andhra Pradesh alone, customers can pay in person at 113 Airtel Relationship Centers or deposit checks in 179 drop-in boxes in front of offices and shops. They can also use the websites of four banks, if they have accounts with those institutions, or arrange automatic debits from their credit card or bank account, though these channels are rarely utilized.

It’s hardly a model of simplicity. Indeed, according to CFO Asia’s 2007 Working Capital Survey (see tables), Bharti’s Days Sales Outstanding (DSO) is 46 days, higher than the sector median of 35 days across Asia and behind the DSO of China Mobile (nine days) and China Unicom (14 days).

Despite this, Bharti Airtel posted the best working capital numbers for the wireless telecommunication services sector. That’s because its Days Inventory Outstanding (DIO) is only one day (sector median: five days), while its Days Payable Outstanding (DPO) is an astonishing 150 days (sector median: 34 days). As a result, Bharti’s Days Working Capital (DWC) is negative 103 days, the survey’s best performance after the DWC of Chinese electronics retailer Gome (negative 108 days).

Sarvjit Dhillon, director of finance and business integration, credits innovation and rapid growth for Bharti’s exceptional working capital management. “We have a unique pay-as-you-grow arrangement with our strategic partners in network infrastructure and IT,” he says. Bharti pays suppliers like Ericsson and Nokia on a schedule that takes into account certain operational and financial milestones, which effectively stretches out the payment period. The intense competition among equipment suppliers for a slice of India’s telecom market has helped Bharti wrangle such concessions from its vendors.

Bharti’s revenues are also growing rapidly, jumping 41% to US$2.6 bn last year. DWC is calculated by adding receivables and inventories, subtracting payables and then dividing by revenues per day – so fast-growing total revenues can help DWC. While infrastructure issues and the Indian consumer’s traditional preference for paper bills and cash payments may hold back its DSO, Bharti is making the most of its luck in winning a telecom license in a red-hot economy – and being the object of affection for suppliers eager to participate in that economic growth.

Overall, Bharti is doing much better than most Asian enterprises. According to REL, the global research and consulting firm that compiles and crunches the numbers for CFO Asia’s annual survey, the median DWC for the biggest 725 listed Asia-headquartered companies is 51 days. Excluding automakers, whose car financing programs skew DSO upwards, the median DWC is 47 days. That’s actually 3% better than the 2005 DWC, which had notched an improvement of 5% from 2004. “It’s clear that improving working capital is still a focus for many companies in Asia,” says REL director of operations Peter Rabjohns.

All tied up

But there is still a long way to go. The total amount unnecessarily tied up in working capital, excluding automakers, is a massive US$535 bn, equal to 32% of the sum of total receivables, payables, and inventories. REL calculated this figure by comparing the results of each peer group with the upper quartile performance of that group. In other words, if each sector as a whole managed receivables, inventories, and payables at the level of the best-performing companies, the surveyed companies in aggregate would not have needed to tie up more than half a trillion dollars in working capital. That money would be better used to fuel capital expenditures and investment.

Freeing those tied-up funds is taking on new urgency because of tighter credit conditions emanating from the subprime mortgage crisis in the US. “In rapidly growing markets in Asia, companies are still going to want to fuel their growth, but they may no longer have all the lines from the banks that were once available to them or enjoy access to the capital market,” says Tarek Anwar, global head for transaction sales at Standard Chartered Bank. “They will need to turn to internal sources of funding, and they must make sure to optimize the use of these funds.”

To release the huge pile of cash, our survey suggests that better management of payables is a good starting point. “Although Asia realized a great overall improvement to a more effective DWC number, this was achieved on the back of a significant deterioration in DPO, whereby companies paid their suppliers faster than they did in 2005,” observes Rabjohns. In aggregate, the companies surveyed showed a 2% deterioration in DPO to 52 days, from 53 days in 2005.

Ironically, one reason for the deterioration may be the new technology and software that companies have installed to improve profitability. Extended to payables, the automated systems may now be paying bills according to the agreed terms, unlike in the past when clerical errors, understaffed units, and paper-based processing may have hampered on-time disbursements. But customers can turn the situation to their advantage, argues Simon Jones, senior vice president for treasury services at JPMorgan in Hong Kong, who works with clients across the region on working capital issues. “Companies with automated processes that pay people on a certain date and advise them of the payment electronically are actually able to stretch their payables,” he says.

That’s because the resulting visibility and structure allow a company to mix and match payment schedules that in aggregate optimize the payables cycle over the long term. For example, an automated system can be programmed to extend the payment period for large bills by a week, while invoices from the same suppliers for smaller amounts may be paid a day early. The suppliers are reasonably happy, since at least some of their receivables are being made good early, while the company ends up with a longer DPO overall.

REL also attributes the deterioration in DPO to growing customer demands for price cuts and the trend to push inventories down to suppliers. In the first case, companies in Asia pay their suppliers early in order to qualify for discounts, which are then effectively passed on to US and European buyers that demand ever lower prices. In the second, companies shorten the payables period for certain suppliers in exchange for those suppliers providing consignment inventory. The goods are warehoused and managed by the suppliers until such time as the buyer needs to use them or has sold them.

Financial ecosystems

The adoption of consignment inventory and improvements in internal company systems are helping cut inventory levels, although it’s hard to say whether the improvement in DIO makes up for the deterioration in DPO. In aggregate, the DIO of the 725 enterprises surveyed fell 1% to 39 days. The biggest improvement was in the distribution industry, which lowered inventory levels by 42% to 34 days, and in diversified telecommunications services, where DIO is down 28% to 4 days. “Asian DIO has been making strides in the past five years,” says Rabjohns. “Inventory has become more sophisticated with more controls and efficient targets.”

What is also happening in Asia, says Farooq Siddiqi, director of transaction banking and global supply chain finance sales at Standard Chartered, is that companies “are starting to collaborate, as buyers or suppliers, on joint ways to reduce levels of inventory or the costs associated with it.” This trend is evident in retailing, particularly when the company at the hub of the collaboration is a large buyer in the US or Europe. While the buyer – a Wal-Mart, say – may continually exert pressure on suppliers for better terms, it may also help those suppliers reduce their overall business costs by helping them find cheaper sources of financing and redesigning their systems so they can in turn push down inventory to their own suppliers.

The emergence of these financial ecosystems in Asia has implications for a company’s cost of capital. At Standard Chartered, for example, credit teams try to assess the end-to-end value and risks of an entire supply chain, rather than focus simply on the individual company that is being considered for financing. “If we’re looking at a double-C rated supplier in a supply chain that the bank has rated as triple-B, we can actually price the supplier as a triple-B risk as opposed to double-C, which means that we can help reduce the cost within the entire supply chain,” says Siddiqi, who cites technology as one of the factors in the development of this new rating technique.

The ties that bind are being extended beyond the upstream supplier-buyer relationship down the distribution chain to increasingly include financial institutions, logistics companies, outsourcing providers, and other support entities. The financial ecosystems that are being built are heading towards an environment where improving working capital management and other systems yield benefits not only for the individual cog but for the whole ecosystem. “We’re seeing incremental improvements in each one of the touch points,” adds Standard Chartered’s Anwar. “It’s to the detriment of everybody if you destroy one part of the financial ecosystem because it’s going to come back and bite everybody else.”

Sales offensive

The third element of DWC is days sales outstanding, and here our survey detects a more marked improvement. In aggregate, the median DSO of the companies studied, excluding automakers, came to 60 days, a 3% improvement from 2005, which itself showed a previous 3% improvement from 2004. Despite the preference for paper-based payments and lack of credit verification structures in some countries, it seems that the receivables systems of Asia’s largest public companies are improving. The banks take some of the credit. Bharti Airtel’s banks, for example, receive, process, and post customer payments, helping mitigate the unwieldiness of the multi-channel payment system.

Richard Brown is senior vice president and regional head of global treasury services at Bank of America, which concentrates on global multinationals and the larger Asian corporations. “Basically, our clients outsource elements of working capital management to us,” he says. “Typically we take a look at a company’s working capital metrics – for example DSO – and draw a line in the sand, saying if that’s what it is today, this is what we can do. We then provide regular metrics to report against that goal.” The bank’s cadres of specialists have taken over the remittance, trade finance, and related functions of key clients such as Sun Microsystems and Cisco.

Outsourcing isn’t free, of course, and there’s always a risk that handing over receivables to a third party could antagonize customers if the provider is too aggressive in demanding payments. As a result, some companies are opting to keep credit collection in-house. These credit collection departments are instead improving DSO by having their bank feed them the right data – the amounts coming in, invoice numbers, payer names – typed in a consistent way so they can then program their internal systems to automatically remove the paid receivable from the ledger and transfer the amount to the balance sheet.

“We’ve done projects in the last year where we’ve automated not only the lock-box receipts, which would be checks, but also giro [direct deposit] and wire transfer receipts,” says Jones of JPMorgan. “Instead of the receivables people focusing on manual key-in and reconciliation, they are able to be more proactive in getting customers to pay on time and working with them on more efficient ways to make payments.”

One regional petroleum company was able to cut reconciliation time to a few hours, boosting the top line. In the past, it had had to wait for several days before releasing fresh stocks to customers, even though those customers had already paid for previous shipments and wanted new supplies as soon as possible. This was because it took time for the receivables unit to record the payment and knock it off the receivables ledger. With automation, payments are posted on the same day, and so stocks can be released faster and more frequently. “They may have improved DSO by two or three days,” says Jones.

Factoring – the selling of receivables at a discount – is helping improve DSO, too. Its impact is more limited, though, because it is costlier than other forms of financing. For the banks, factoring is a viable offering only in markets where abundant financial information on companies helps with credit assessment. Factoring without recourse “hasn’t spread across all markets in Asia,” says Standard Chartered’s Siddiqi. “In some countries, like Japan and Taiwan, factoring is quite sophisticated and at the level of what’s happening in Europe. In other countries like India, the factoring market is just beginning to pick up.”

Going forward, REL sees further improvements in Asian DWC if sales continue growing at its current “very healthy pace” of 7.6% and if companies continue outsourcing back-office processes that have an effect on working capital performance and implement sophisticated financial management systems. More unnecessary working capital may be freed as national and global financial clearing systems are improved, thereby giving companies additional tools to further trim the receivables and payables cycles.

Above all, much depends on the CFO’s sustained campaign to match or exceed the sector and country benchmarks in this working capital survey. Watch this space.

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Cesar Bacani is a contributing editor of CFO Asia.