Published : 4 years ago, on 11/09/2020

By Oliver Belin, Marketing Lead at Marco Polo Network

As companies become increasingly global in scale and physical supply chains are gaining in complexity, financial supply chains are also becoming more complex. The result is an increase in risk of supply chain disruption that

companies need to proactively manage. Supply Chain Finance programs have become a popular way for leading corporates to protect their supply chain and minimize the risk of disruptions.

Companies recognize the importance of working capital management to support their business in difficult times, and many have begun to look across the financial supply chain for opportunities to unlock trapped cash. In fact, generating additional cash flow through better management of working capital is a route that is being adopted by most leading organizations. With enough examples of successful implementations in the marketplace, Supply Chain Finance has emerged as the most popular solution for working capital management. This article describes the importance of liquidity for organizations and how working capital trapped in supply chains can be unlocked with Supply Chain Finance.

Liquidity, cash flow and working capital

The strategic management of liquidity, cash flow and working capital is essential to the survival and growth of any company. As the economy rebounds from the aftermath of the global recession, corporations have been taking stronger action to generate additional cash flow by managing their working capital more efficiently. Proactive management of working capital is also being mandated by the fact that cash requirements are underpinning strategic decision-making.

Past experience indicates that the priority given to cash and working capital management tends to have an inverse relationship with economic performance. In periods of contraction or sluggish growth, cash and working capital issues rise to the top of the boardroom agenda. When prosperity returns, the focus shifts elsewhere. However, the past is not necessarily an accurate predictor of the future.

Today, even though the last economic crisis is more than a decade old, the cheap finance that fueled the preceding boom is nothing more than a rapidly fading memory. Given this new reality, there has been a sustained shift in corporate behavior, with effective cash and working capital management rising to the top of the corporate agenda yet again. A recent survey supports this trend by showing that a majority of CFOs have been holding larger cash balances as a strong priority. For these CFOs, the next step is to identify the options available to unlock the working capital trapped in their ever-complex supply chains.

Importance of Cash Management[1]

Unlocking working capital in the supply chain

Oliver Belin

With multiple factors governing a company’s working capital performance, there are some aspects such as input costs that are beyond control as well as other factors which can be managed, controlled, and improved through strategic measures. These measures include: managing the firm’s inventory efficiently, collecting cash from customers early, and extending payment terms to suppliers.

Currently, the most common measure to manage working capital performance adopted by corporations worldwide is extending supplier payment terms, since it is an easy short-term action. However, seller actions run contrary within supplier organizations where the focus is on sustainable receivables improvement and getting paid earlier. With many suppliers undergoing financial stress, extending payment terms cause an increasing concern for buying organizations over the stability of their supply chain.

Furthermore, this approach often results in a domino-effect as suppliers respond by adopting similar measures with their own supplier base. Hence, a huge amount of working capital is being locked up across the entire supply chain.

Companies often underestimate their ability to extend payment terms with their suppliers. They lack awareness of financing opportunities that would add value to the firm, while strengthening relationships with suppliers.

Supply Chain Finance is increasingly being seen as the solution to this dilemma.  Supply Chain Finance addresses two challenges simultaneously. It allows the buying organization to extend their payment terms in order to improve their working capital, whilst minimizing the risks to continuity of supply by allowing their suppliers to get paid earlier at attractive financing terms.

Supply chain finance unlocks working capital

In today’s market, there is a very strong demand for Supply Chain Finance from large buying organizations as well as their suppliers. Companies from various industries have already implemented Supply Chain Finance programs and achieved more than $100 Million in additional cash flow within just a few months.

Many corporations realize that Supply Chain Finance is not only about improving their working capital but also reducing the risk in their supply chain and improving relationship with their trading partners. Additionally, governments across the world are recognizing the importance of providing ongoing liquidity sources to local businesses and boosting the use of Supply Chain Finance as an innovative way to ease the funding squeeze for many smaller companies.

What is Supply Chain Finance?

Supply Chain Finance, or Reverse Factoring, is a solution that helps meet corporate objectives including:  working capital, EBITA, and mitigating supply chain risks. It allows corporates to increase their payment terms and/or provide the option to their suppliers to get paid early.

How does Supply Chain Finance work?

Supply Chain Finance allows a buying organization to optimize its payment terms to its suppliers and improve its working capital. At the same time, it gives the option to its suppliers to receive early payment based on attractive financing rates.

The funding rate is based on the buyer’s credit worthiness or rating rather than on the supplier.

• In practice, the supplier submits invoices to the buyer as before for approval following a commercial transaction.
• The buyer approves the supplier’s invoice for payment and electronically transmits the payment instruction to the Supply Chain Finance Platform.
• The supplier is notified and has full visibility on future dated receivables on the Supply Chain Finance Platform.
• The supplier has the option to trade his invoices immediately and get access to cash by one of the funders or, alternatively, can choose to wait until invoices are due.
• On invoice payment due date, the Supply Chain Finance retrieves the full amount of the invoice from the buyer in settlement of any discount or (if discount has not taken place) effects payment to the supplier.

[1] http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/kpmg-spotlight-november-2011.pdf