In the past it might have seemed akin to finding loose change down the back of the sofa, but as global supply chains stretch, firms are under pressure to pay more attention to the working capital which is trapped therein.
Reverse factoring will optimise cash flow, lengthen payment terms and open the opportunity to get receivables paid early. Little wonder that CFOs are under pressure to examine the options. Problems can be ironed out to the benefit of buyers and suppliers alike. The former can optimise working capital and the latter can enhance cash flow. In both cases this minimises risk across the supply chain.
Although once underused, supply chain finance (SCF) has developed dramatically over the past few years, aiding the management of liquidity with a focus on capital invested in transactions across the corporation. Yet many companies are confused about the benefits and the techniques required to fully exploit SCF.
This reluctance to examine SCF is due to the impact of Fintech and the confusing terminology which surrounds the process. This double whammy has particularly impacted SMEs. It is hoped that the steps taken by the International Chamber of Commerce in 2016 have helped to make things a little clearer. The Standard Definitions for Techniques of Supply Chain Finance should provide a road map for finance officers to understand the process.
Standardisation aims to ensure a clear communication of what is, after all, a complex system involving not only finance, but legal and regulatory authorities where the supply chain is cross-border. As SCF grows in importance, it is vital that corporations and stakeholders gain clarity and consistency in the techniques used.
Given that this standardisation is now in place, how do companies come to terms with understanding the purpose of SCF?
Put simply, the aim is to finance trade and mitigate risk, a nirvana for most finance departments. Accordingly, CFOs should be looking closely at the opportunities. In an age of complex supply chains, the number of links is ever increasing in sharp contrast with single supplier relationships where traditional instruments such as documentary letters of credit are applicable.
Efficient SCF aligns the needs of the buyer and the supplier, delaying the payment on one side and easing payment on the other. This dynamic, whilst familiar, is exacerbated by the modern complexity of the supply chain.
A simple example of this is where suppliers can be advanced finance on the strength of unpaid invoices linked to the creditworthiness of their buyer. The trick is that SCF also benefits the buyer, allowing them to negotiate good terms without impacting on their liquidity.
Technology ensures that the benefits of process automation are available, allowing trading partners real-time transparency in both the financial and physical supply chain. This has the bonus of allowing finance departments to see where their working capital is tied up and helping trading partners to improve efficiency in the supply chain.
Interestingly, SCF also lends itself to open account trades, allowing the buyer to settle invoices within an agreed timeframe after accepting delivery. Open account trade is growing globally and is no longer restricted to parties with long trading relationships. This is one of the major impacts of SCF over the past few years and the trend is expected to continue to the benefit of all parties.
Companies are increasingly opting to operate on an open account basis, but unless you have considered how your SCF is working, you will be left behind and your company will suffer as this kind of trade gains a foothold in the global market. Traders are increasingly attracted to it with its cost efficiency, flexibility and transparency helping to mitigate risk. SCF solutions are increasingly of interest according to surveys of trade finance, and its use is sure to continue to grow.
The real challenge for many companies is to drive the adoption of SCF. Old habits die hard, and finance departments need to persuade their boards as to the real benefits. It is the responsibility of stakeholder communities to embrace the new technologies and systems and put them to work. This of itself will widen the scope of SCF and enhance its appeal.
We are only just seeing the rise of SCF as it impacts on supply chains, increasing efficiency and ensuring secure management of liquidity to the benefit of all parties in the chain.
Wiser CFOs won’t be left moving the corporate cushions looking for loose change… they will embrace SCF and realise substantive benefits.
Simon Lynch is the owner of Treasury Talent.
Treasury Talent is a specialist treasury talent, recruitment and search provider solely focussed on the treasury market with offices in Sydney covering Australia, Singapore covering Asia, and San Francisco covering California and the USA. To make contact email@example.com