THE CURSE OF NEGATIVE WORKING CAPITAL

Most companies have a structurally POSITIVE working capital.

This means that the amount of their inventories, receivables, and prepayments exceeds the amount of liabilities towards suppliers and advances received.

When these companies grow, their working capital increases, which means they have to finance it somehow.

Normally, revenue growth is a sign of an increased demand, so banks might have more faith in the company’s future earnings and hence approve loans more easily.

When revenue drops, working capital decreases and is released into liquidity until the next upturn. In these circumstances, the release of working capital alleviates the pressure on cash flow.

However, there are companies with a structurally NEGATIVE working capital.

This means that the amount of their liabilities towards suppliers and advances received exceeds the amount of inventories, receivables, and prepayments.

You might see this situation with airlines, travel agencies, tour operators, hotels, food retailers…

This means they receive money upfront and can use it for other purposes before paying their liabilities towards suppliers.

When these companies grow, their working capital gap increases, meaning they get more money in advance! This is great, because they don’t need to rely on banks to support their growth.

Yes, but…

When revenue drops, working capital gap decreases and they need more cash to cover it. This means they need the support from banks when demand is decreasing, which can make obtaining loans impossible or very costly.

The above situation hit FTI too.

Before the pandemic, their working capital was negative at -200m €. This means they could use this money to finance other stuff on their balance sheet.

But when the crisis hit, their working capital went into positive in 2020 at 52m €, and going back to negative in 2021, however only at -101m €. This means they needed additional 252m € in 2020 to finance working capital. In 2021, they needed 100m € more when compared to 2019. Things were bad anyway, but this made it even worse.

I bet 2023 and H1 2024 were bad from the working capital point of view…

That’s the issue with companies with structurally negative working capital.

When things are fine, you’ll be better off than many others.

When things are not fine, you’ll be worse off than many others.

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Working capital management is a crucial element of liquidity planning and financing strategy.

You certainly don’t want to run out of cash.

But you also don’t want to take out more loans then you need or hoard cash you don’t use.

If you think I can help you build financial strategy and optimise working capital, feel free to get in touch.