Conditions call for closer working-capital management
Ezequiel Wilbert
Divulgação
The combination of a double-digit benchmark interest rate (Selic), inflation above the target ceiling, and tighter credit requires midsize companies to pay closer attention to working-capital management. Financial experts say working capital must be treated as a strategic variable rather than merely a routine treasury matter. An analysis prepared exclusively for Valor by consulting firm Safegold shows that the cost of liquidity is no longer a secondary detail. It has become a critical factor that erodes profitability, squeezes margins, and can accelerate solvency crises.
The study shows that while subsidized credit lines carry rates of around 13%, market-rate credit for midsize companies ranges from 24% to 26% a year. In receivables-advance transactions through factoring companies, securitization firms, and credit receivables investment funds (FIDCs), the effective cost can exceed 34% a year.
“A midsize company that treats working capital as a strategic variable rather than a treasury task reaches the end of the cycle with its margin intact and its balance sheet under control. A company that continues financing its entire operation by discounting receivables at 34% a year will unknowingly enter the 18-to-24-month window preceding a crisis,” says Ezequiel Wilbert, a partner at Safegold.
According to Ahmed El Khatib, coordinator of the Center for Financial Studies at the Álvares Penteado School of Commerce Foundation (FECAP), liquidity has directly influenced business strategy over the past decade because it determines how much of the wealth generated by operations remains within the company. In this context, one of the most critical situations is continued dependence on expensive credit lines to finance daily operations.
“In that situation, financing costs are no longer occasional—they become structural,” El Khatib says. “Continued use of credit reduces available cash flow, increases debt, and worsens indicators such as interest coverage, financial leverage, and the current ratio,” he notes.
Safegold’s analysis simulates two scenarios involving a company with annual revenue of R$120 million, a projected earnings before interest, tax, depreciation, and amortization (EBITDA) margin of 12%—R$14.4 million—and average financing costs of 24% a year. In the first scenario, the company has an average collection period, or days sales outstanding (DSO), of 45 days, tying up R$15 million in receivables, Wilbert explains. “When that period extends to 75 days, another R$10 million becomes tied up as an asset. Financing that additional capital burns through R$2.4 million, equivalent to 16.7% of the company’s entire annual EBITDA,” he says.
The other scenario assumes that the company advances all its receivables. Wilbert notes that this creates even greater financial pressure by consuming approximately 42% of total EBITDA. “The company begins advancing 100% of its receivables to plug the cash-flow gap. That means financing R$25 million—the original R$15 million plus another R$10 million from the longer collection period—generating total interest of R$6 million during the period: R$3.6 million on the R$15 million and R$2.4 million on the additional R$10 million.”
In the company’s daily operations, El Khatib says transactions of this kind increase the market’s perception of risk, affecting future borrowing costs. He points to a self-reinforcing cycle in which the company pays high interest rates because it presents greater risk. “Debt increases financial expenses. Those expenses reduce cash generation. Lower cash generation requires new debt, making growth even more expensive,” El Khatib explains.
He advises companies to answer four crucial questions: How much additional cash will be needed? How long will that cash remain tied up? How much will financing it cost? Will the expected return exceed the cost of that capital?
“If the answers are unknown, the company risks growing only in size while losing economic value. Truly sustainable growth is financed predominantly through the company’s own cash generation,” El Khatib emphasizes.
Wilbert says there is no formula for determining an ideal debt capacity because it depends on the company’s margin and how long its money remains tied up. “The cost of the money while it is tied up must be lower than the profit generated by the operation during that same period. The relevant profit is operating profit after depreciation. Anyone who calculates this using EBITDA overestimates what the company actually has available to pay interest,” he says.
Safegold’s analysis shows that the cost of the credit midsize companies routinely use ultimately consumes most of their earnings. “The solution is to reduce the amount of time the money remains tied up because that changes how much the company can afford to pay,” Wilbert says.
Translation: Todd Harkin
