When it comes to supply chains in the protective clothing industry, we are facing unprecedented challenges. As we open back up post-pandemic, we face new challenges brought on by hyperinflation and the run-on effects of that when it comes to working capital and cashflow. In this blog, we explore how this situation came to be, and what it means going forward.
Working capital and cashflow: what are they?
Before we dive in, it is useful to provide a basic breakdown of what working capital and cashflow mean.
Working capital refers to a company’s cash reserves for the day-to-day running of the business. This consists of three key components:
- Inventory: the stock you have to sell
- Accounts receivable: payments you are due to receive
- Accounts payable: payments you are due to make
Cashflow refers to the year over year change of the money a business has in its account. It consists of two key components:
- Operational cash: the money made from running the business
- Investments: money invested in working capital and assets to grow the business
Deducting investments from operational cash will allow a company to see how much available cash they have.
How does hyperinflation affect working capital and cashflow?
Hyperinflation has had an impact across the entire textile industry — as well as multiple non-textile industries — forcing the entire value chain to raise its prices. We still have the same volume of stock to sell, and in order to survive, we cannot continue to sell it at the previous prices. Of course, this has a run-on effect on the supply chain — meaning that the price increase from our end has to be passed on through the chain and ultimately to the end user. Thus, at all points of the supply chain, working capital must be re-evaluated in order for businesses to stay afloat. Furthermore, we must re-assess our cashflow in order to understand what we can afford in the new financial climate.
Alongside the necessary price increases we have to make in order to survive, hyperinflation will have a significant impact on working capital and on our cash position. The textile supply chain is quite long and inventory positions should be pre-financed. Given the hyperinflation situation, much more cash is locked in to run our day-to day business.
Below is an example calculation to demonstrate how hyperinflation may affect a business’ working capital and cashflow. Required working capital in the textile industry is approximately four months, and the average inflation rate is 30%. This required as % of annual sales 10% more cash to run and pre-finance the business (4/ 12 * 30%). For example a company with 100 million in sales and 33.3M on working capital, in today's climate requires 43.3M in cash to realise the same volumes.
|In millions||Old Situation||Hyperinflation||Difference|
|Working Capital||33.3||43.3||+10M (+30%)|
The example above shows us that the need for working capital is now considerably higher, which can mean that in the case of a company that has no reserves left, they have to borrow extra money from the bank to continue to run their business. This can cause problems, because if profitability was less during the pandemic they may have issues getting a larger loan. Ditto for cash flow: if hyperinflation leads to less cash flow, there are fewer reserves to expand working capital.
Evolving in the face of hyperinflation
There’s no doubt that hyperinflation presents a huge challenge for the protective clothing industry. There are no simple solutions here. However, better cooperation across the supply chain and harmonisation of supply and demand will help all of us to maintain a healthier working capital and cashflow situation. Improving our overall efficiency — which is indeed difficult with current supply chain issues — will allow us to build in more buffers to cope with unforeseen circumstances.