Treasurers struggle to manage e-commerce working capital cycles

The intricacies of capital flows and stock ownership mean that traditional working capital cycles do not apply to the e-commerce industry. Business, however, still needs to be done, even while regulators are tightening controls.

A different structure is needed to navigate an increasingly volatile environment. 

Sandip Patil, ‎managing director and region head, global liquidity and investments, Asia-Pacific, at Citi, says: “It is creating a challenge for treasurers, who are compelled to constantly redesign and upgrade their systems and processes to harness client buying behaviour, and react to tax, regulatory and payment landscape changes.  "Legal vehicles and structures continue to emerge fast as e-commerce deepens in regulated and open markets simultaneously.” 

The structure of ownership of goods in the e-commerce space affects the flow of cash in ways traditional retailers do not have to contend with. 

Navinder Duggal, managing director, global transaction services, at DBS Bank, says: “In many cases, the business model is based on taking a margin on the actual transaction. The traditional cash-conversion cycle may not fully apply to the e-commerce model, as the e-commerce platform provider may not own the inventory of the goods. They may adopt a tenant model and charge a mix of fixed fees and transactional margin.”

As well as receiving funds, companies need to structure how they will make payments. 

Duggal explains: “The settlement with the various merchants on an e-commerce site is quite complex and needs to take into account certain factors such as special promotional campaigns, discounts, returns and payments to service providers and taxes. 

"This space is still evolving and new settlement and profitability measurement systems will emerge in due course.”

To meet the growing complexity requires an overhaul of the approach to cash cycles that responds to changing liquidity requirements.

The flow of cash is not easy for the treasurer to predict. 

Citi's Patil says cash flows are driven by the holiday seasons, and flash online sales and discounts not utilized by traditional retailers, making it difficult to forecast even a few months in advance. It requires a joint effort including sharing the details of strategy across the company to enable longer-term forecasts to be made.

“They really have to embed a stronger cash flow forecasting tool in partnership with sales and marketing teams, and drive this down to the level of the operating entities across geographies," he says.

“Traditionally, organizations get better in three- to six-month cycles of cash flow forecasting as these tools embed. E-commerce presents a very different set of challenges and requires significant daily or weekly cash flow forecasting, still keeping an eye on longer-term cash flows.”

Finding a solution requires the treasurer to be closely involved. 

Patil says treasury platforms are not being developed quickly enough to keep pace with what these companies require.

“Treasurers need to think on their feet," he says. "The industry really requires treasurers to be adaptive and rapid to change. They don’t know what each day will bring. It really creates challenges in their cash flow forecasting, liquidity and funding plans. The results are keeping the treasury policies dynamic. The treasury eco-systems are not necessarily evolving rapidly enough to accommodate the changes.

“In such a dynamic environment, the policy and framework need to be extremely dynamic and accord required flexibility to the operating units. This is without compromising core risk-management and principles or yield objectives.”

From the treasury standpoint, companies can work on developing such systems that work specifically for them, rather than waiting for the banks to create a customizable platform.

Simon Jones, head of treasury services advisory in EMEA, at JPMorgan, says some companies are being innovative in their approach, developing solutions to fit their unique business structure.

“E-commerce companies are leading the way in developing new subscription and pre-paid business models for services and goods," he says. "This is driving structural change to traditional working capital cash conversion cycles in many industries and leading to disruption among traditional companies competing in the same industry.”

Companies can also utilize their returning client base to ensure there is a store of funds that can be accessed. 

Jones adds: “In addition we are seeing more e-wallets being provided by e-commerce companies, increasing the money they receive from customers upfront and therefore improving their days sales outstanding significantly.”

He further suggests that payments on behalf of structures can also work in some cases to simplify and standardize working capital arrangements across a group company’s various organizations.

Regulators and tax authorities are up against the challenge of keeping tabs on these operations. 

Patil says: “When cash flows so rapidly, whatever is implemented can’t be a static policy. For example, we are seeing a common thread of changes in VAT/goods and services tax to cover e-commerce flows across key Asian markets, like Australia, China, India.” 

Duggal at DBS says there are concerns around the usage of the data compiled through these platforms.

“The regulators are also watching this space actively, and in some jurisdictions there are new regulations that are aimed at providing greater protection to the end-users," he says. "As e-commerce and payments are a rich source of transactional data, regulators would be keeping an eye on how this data is managed in a secure manner and how it is used in areas like credit scoring. 

"In terms of taxation, there are some areas that will be under greater scrutiny, especially cross-border transactions.”

China, for example, last year changed its tax policy to treat cross-border e-commerce purchases as imported goods, which are subject to import tariff, import VAT and consumption tax. Previously, purchases had been treated as personal postal items. The shift comes as e-commerce sales rise to account for almost 20% of overseas trade.

JPMorgan's Jones says that in complying with regulation there is room for the treasures to work with their banks to find a solution amid the complexity.

“Global tax initiatives mean corporates are evaluating their business models and many are moving away from centralized entities by region to more individual entities by each market. 

"This is adding to the level of complexity in treasury operations, making them more decentralized and therefore driving companies to review new treasury structures, such as payment factories and liquidity management options (for example, multi-currency, multi-entity cash pooling) to manage the added complexity on a global basis.”