A smooth onboarding process can help build supplier adoption rates for supply chain finance programmes as large corporates look to focus on working capital management, says Adeline de Metz, Head of Supply Chain Finance Solutions at UniCredit
Large companies have typically been less active than their smallerpeers when it comes to working capital management, but the influence of unprecedentedly low borrowing costs and a continued corporate emphasis on key performance indicators (KPIs) is beginning to change this. Large corporates are increasingly turning to working capital management techniques – not only to improve balance sheets, but also to secure their supply chain or to offset large capital expenditure projects.The use of receivables and supplier financing has thus become an important cog in the workings of many large companies.
Certainly, in the current low-interest-rate environment, large corporates can realise particularly strong value from a more extensive working capital management programme. The availability of cheap borrowing presents an excellent opportunity, for example, to boost KPIs such as return on capital employed (ROCE) and days sales outstanding (DSO) through receivables finance.
Larger companies also often undertake major capital expenditure projects – investments that promise long-term returns, but create net outflows in the short term. Receivables finance can be a useful tool here –offsetting outflowsin a flexible way to keep the books in order.
Supplier financing can also help counterbalance negative cash flows from this kind of initiative. By offering financing on competitive terms to their capex suppliers, companies can negotiate extended payment terms in return – at once affording more time for them to meet their liabilities when free cash flows are constricted and driving up the days payables outstanding (DPO) figure on the balance sheet.
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More generally, supply chain financealso delivers considerable value in terms of harmonising the activities of departments where priorities often conflict. For instance, treasury departments typically focus on financial KPIs and DPO increase which, while positive for the company’s balance sheet, can have a negative effect on suppliers’financial situation. Procurement departments, meanwhile,are typically set up to minimise the cost of suppliers – an approach that has a direct positive impact on the company’s P&L. However,cultivating a healthy supply chain is also one of their main priorities.
Supplier financing offers a way of resolving this kind of conflict – improving payment terms in line with treasury priorities while at the same time providing a boost to the supplier through access to better credit facilities without compromising the P&L impact of favourable purchasing conditions. What’s more, it can also help build stronger relationships with suppliers – improving, trust, stability and efficiency in dealings with key partners.
Bringing suppliers on board
These benefits, however, are not always so easy to realise. In particular, a number of companies have experienced difficulties onboarding their partners onto supply chain finance programmes – leading to underwhelming adoption among suppliers and limited benefits to all involved.
Corporates can look to their banks to make the difference here – and the key will be better meeting the varying needs of the suppliers involved. Instead of opting for a “one size fits all” approach to onboarding, banks can help corporates by accounting for these needs in their processes. This can be done efficiently by stratifying suppliers into different categories, such as “strategic” and “non-strategic” – and adjusting onboarding methods according to the needs of the suppliers in each category.
Categorisation, of course, can only go so far. Most large corporates work with supply chains that extend throughout many geographies – encompassing diverse regions and cultures. In such cases, banks must use their global reach and intimate understanding of local geographies and their idiosyncrasies to ensure this diversity is accounted for in their interactions with suppliers.
A platform for success
Of course, technology will also inevitably play a role in improving supplier onboarding – bringing simplicity and speed to a complex process. This is something we are looking to do at UniCredit with our global supply chain finance platform for invoice discounting. Platforms such as this can drastically reduce processing time and costs, while also offering a clear picture of the overall process for both buyers and suppliers.
Developing these digital services is a must for any bank looking to support corporates with their working capital management. Collaboration with clients and their suppliers will be a central part of any well thought-out solution, and – with the rise of financial technology companies – many third-party platform providers could also prove valuable partners in the bid to bring new and advanced products to the market quickly and effectively.
Certainly, through a combination of tailored approaches, close co-operation with the buyer’s procurement and treasury teams, and robust digital platforms, banks can do much to mitigate the difficulties corporates face when onboarding suppliers to their financing programmes. And with these issues ironed out, these companies are free to seize the opportunities to refine their balance sheets and bolster their supply chains – creating a more efficient, trusting and profitable environment for all.