If there is one thing that all business leaders count on to remain constant, it is uncertainty. Uncertainty in economic and political factors can alter a company’s short-term and long-term goals, and often informs and influences important strategic decisions. A changing political landscape may negatively impact the ability of a company to have access to working capital, which can have far-reaching effects as it may constrain liquidity that could otherwise be used to fund growth, reduce debt levels, lower costs, maximize shareholder returns, and even compete effectively with peers.
Today, businesses are currently wrestling with the effects of Chinese tariffs and proposed Mexican tariffs, with the industrial sector being one of the market segments most at risk. This includes building products, construction & engineering, electrical equipment, road & rail, and transportation infrastructure, just to name just a few.
For many companies impacted by the tariffs, the unavoidable effects are easily acknowledged: we are (or will be) paying more for raw materials or products needed to run our business. The business question becomes “do we pass them onto the end-user?” Beyond these obvious and unavoidable hurdles, business leaders should be asking if there are tangential costs that can be reduced or eliminated by taking a more proactive stance towards managing the working capital pipeline.
As companies initially adjust to the imposed tariffs, they may take some quick steps to limit or avoid rising costs and, where necessary, to assist their clients’ absorption of the resulting higher prices:
The real and immediate impact of these decisions is that it locks up working capital in inventory and/or accounts receivable. The company becomes the lender and warehouseman for the benefit of its customers and vendors. Potential longer-term impacts are increased carrying costs, reduced liquidity (possibly limiting strategic options), increased accounts payable, increased obsolete inventory costs, and increased bad debt expense, among others. So, what are the strategic solutions to be considering?
The short-term steps that manage cost of goods and maintain the customer base are logical. But what can be done to minimize the unwanted financial consequences that come along with these decisions?
Long-term planning and implementation of targeted procedures and processes can be added to help identify, monitor, and address other issues that would otherwise negatively impact working capital.
Working capital is impacted every day - not only by the decisions that a company makes but also by market forces. Thoughtful planning and vigilant monitoring of working capital processes and metrics designed to maximize utility will strengthen your balance sheet and improve operational performance. When you lead from a position of financial strength, you will have more options not “if”, but when, your company is forced to adjust to the ever-changing landscape in which it operates.