Why Tariffs Require CFOs to Reshape Working Capital Strategies

Recently, a Bloomberg article delved into how tariffs are turning CFOs into chief cash collectors. The pun itself is quite witty. But more than that, it’s true. Tariffs increase the costs on businesses – putting more pressure on them to be smarter and agile in how they manage their working capital and cash flow. 

Higher tariffs can increase the cost of goods imported, which can have a knock-on effect on a company’s margins and cash flow. Plus, higher tariffs can squeeze a company’s profitability. For instance, companies might need to raise prices to offset their increased costs. But this could turn off the company’s customers and affect demand – leading to a decline in sales, which is the opposite effect of what they wanted.

When it comes to working capital, one of the most important levers is Days Beyond Terms, or DBT, which refers to the number of days late a company pays its bills. Overdue payments have already been on the rise in 2024 in the US, Europe and Asia, according to Creditsafe data. US companies, for example, were on average 19.5 days late paying their suppliers, while the metric stood at 24 days in Europe and at 37 days in Asia, up nearly 50% from 2023, as the Bloomberg article explains. To make matters worse, our recent study, Cost of Late Payments , found that 86% of businesses reported that up to 30% of their monthly invoiced sales are overdue.

This is why it’s so important to review the business credit report of every customer you work with – both at the start of the relationship and throughout the customer lifecycle. You shouldn’t just pay attention to credit scores and credit limits. Look closely at their historical payment data – focusing on their Days Beyond Terms (DBT) trends and aging of their outstanding bills over the most recent 12-month period. This will show you clear patterns of how your customers pay their own suppliers – meaning you can get a data-driven estimation of whether they’ll be a reliable payer and how soon you can expect payment.  

Now let’s talk about cash flow. This s essentially the movement of money in and out of your business. Having a healthy cash flow means your operations will run smoothly, bills can be paid on time and growth plans can be maximized. 

There are several factors that can affect your cash flow, which include:

• Accounts Receivable management 
• Credit policies 
• Accounts Payable
• Financing decisions 
• Inventory levels
• Investments  

I’ve already talked about how tariffs can increase the risk of non-payment from customers. But the impact of tariffs on your suppliers can have a domino effect on your business. If your suppliers increase their pricing, shorten your payment terms or require upfront cash payments, that could affect your own cash flow. So, now on top of the higher tariffs you’re paying, you may be faced with paying more to your suppliers – which may not have been budgeted and planned for in your annual plans. And if your customers are repeatedly paying your company late, then you may not be able to meet the shortened payment terms with your suppliers. 

If you can’t pay your own suppliers on time, that means your company’s DBT will likely increase – or become erratic and unpredictable – revealing cracks in your financial health and liquidity issues. So, if and when you need financing or are planning to expand the business into new markets or launch new products, a high DBT could stand in your way and create complications. 

Over the last few years, supply chain concerns have been on everybody’s mind. From the disruptions caused by COVID-19 lockdowns to geopolitical instability, it’s more important than ever that you know your supply chain inside and out. That way, if there’s ever an issue with a supplier or a customer, you’ll know what to do.

Tariffs can push the prices of raw materials and supplies up – as well as transportation and logistics costs. So, companies either absorb these costs or pass the costs onto their own customers. It’s not an ideal situation.

At the same time, tariffs can push companies to look for alternative suppliers in countries where tariffs aren’t as high. This could lead to delays in production and delivery of goods to customers as well as increasing operational costs. And then there’s inventory – higher tariffs could mean that companies aren’t able to maintain their standard inventory levels. That could cause stock shortages and longer waiting times for customers to receive their orders – both of which could end up costing the business their loyalty and repeat orders in the future.