Financial Supply Chain & Working Capital Management
by Markus Wohlgeschaffen, Head of Global Trade Finance & Services, UniCredit
When we look at a successful corporation, the first things we notice are the excellent products and services on offer. On a closer look the less immediately visible aspects, that play a major part in the success of a successful company, become more apparent. A key component is efficient supply and working capital management. Often, despite the development of innovative products, entrepreneurial failure is due to the lack of a sufficient cash flow to finance operations.
Both businesses and financial institutions have realised the need to focus on the active management of working capital and the related financial supply chain management, in the same way as in recent years, corporates have optimised their physical supply chains.
According to various studies some 4% of production costs are related to financing costs. With this in mind, and considering that the so-called order-to-live’ cycles continue to be further extended, there is an increasing tendency to focus on the qualities of an optimised financial supply chain. Buyers are required to increase their payment terms to the maximum as well as to reduce their stock and inventory, leaving this ‘burden’ to their suppliers. But not all suppliers, even strategic ones, can manage the request for longer payment terms considering the changed regulatory environments (Basel II & III force banks to differentiate the equity allocation according to the relevant rating of the borrower) and market conditions (the reduced number of banks).
GTB and Trade Purchase
The efficient management of the financial supply chain and working capital is one of the strengths of UniCredit´s product line Global Transaction Banking (GTB). GTB’s product offering has been developed to help UniCredit’s clients optimise the different elements of their working capital throughout the entire supply chain and deliver successful win-win solutions to the parties involved.
Safeguarding one's own liquidity is the key not only to survival during a financial crisis but also to further success.
Safeguarding one’s own liquidity is the key not only to survival during a financial crisis but also to further success; moreover, the support of, active management and co-operation with core suppliers plays an important part in ensuring a constant and quality-assured supply chain.
UniCredit has developed a dedicated product - an internet-based system called Trade Purchase, that automatically links the real supply chain with the money supply. There is a great toolbox offering numerous effects and tailored solutions. Trade Purchase is accessible round the clock: an easy to use, web-based internet solution which enables UniCredit Group’s customers an automated and revolving purchase of buyer-accepted invoices at attractive rates.
One of our key clients in the automotive sector, a tier-one supplier, recognised the need to increase its working capital management and also to provide as much support as possible to its core suppliers. For this corporation sustainability and reliability are fundamental, and are also reflected in their dealing with suppliers. Many of those suppliers were adversely affected by the financial crisis and the lack of demand in the sector. The company decided to support them by giving them a good rating but the question remained: how to provide the urgently needed liquidity to them without jeopardising the firm’s own liquidity and/or affecting its own key financial ratios (e.g., increase of debt to equity ratio)?
To help the suppliers on one hand, while aiming to optimise its own working capital situation on the other, it was decided to implement a supplier financing model that avoids manual processes and ensures a high degree of flexibility. During the structuring and technical set-up of the transaction, it was a challenge to make sure that the system was able to deal with credit notes and different currencies as well as individual limits for each supplier in order to mitigate or reduce risk to the buyer.