Driving the Next Generation of Financial Supply Chain Solutions
by Jon Richman, Head of Trade Finance and Financial Supply Chain Americas, Global Transaction Banking, Deutsche Bank
As the use of financial supply chain tools for optimising working capital has become increasingly prevalent over recent years, these techniques are now becoming more mature and the benefits more predictable. This article considers the factors that are contributing to the growing success of financial supply chain solutions and how they are likely to evolve in the future.
The strategic importance of working capital
Today, treasury performance is frequently measured using working capital metrics, and working capital objectives are now an essential element of corporate strategy. As a result, treasurers and finance managers are far more specific in their working capital objectives than in the past. For example, many treasurers are now seeking alternative forms of liquidity to diversify access to funding and mitigate liquidity risk, and increase the resilience and efficiency of their supply chains. These are in addition to, and often conducted in tandem with, more traditional payment and collection centralisation and automation initiatives, but the focus is now more on improving days payable outstanding (DPO) and days sales outstanding (DSO) metrics in addition to cash management efficiency.
Enhanced performance against working capital metrics
We are seeing a particular interest in two categories of working capital solutions among corporate treasurers: supplier financing and distributor financing. Looking first at supplier financing, while these programmes have become increasingly popular over the last few years, they are now growing in both size and geographic reach. For example, cross-border, multi-currency programmes are becoming more popular, fuelled by greater confidence and expertise in design and implementation, and a growing investor base in these types of programmes, which is in turn creating further capacity.
Treasurers are also becoming more ambitious in the terms extension that they are seeking when establishing or expanding a supplier financing programme. While improving DPO remains the primary consideration, there is growing awareness of the need to create a ‘win win’ for both the corporate and its suppliers, in order to maintain strong supplier relationships and increase supply chain resilience.
Conversely, receivables and distributor financing aim to improve DSO, improve top line growth and enhance the company’s risk profile by offloading credit risk to banks and therefore, enabling them to do more business. The growth of these techniques reflects banks’ evolving role as a strategic working capital partner to their customers. For example, they are becoming vital third parties in the relationship between customers and their often thinly capitalised distributors, allowing them to work more closely together and generate top line growth. In the past, securitisation was often used as a way of achieving the same DSO objectives, but these can be difficult to set up and manage in practice. In contrast, accounts receivable and distributor financing programmes are more flexible and easier to implement, and have the advantage of achieving a ‘win win’ for all participants.
One of the challenges of early financial supply chain programmes was that suppliers and distributors were unfamiliar with these programmes, so onboarding suppliers was difficult with relatively low adoption rates in some cases, therefore, limiting the working capital benefits. Today, there is far greater market awareness of the opportunities that these programmes offer, and onboarding processes have become more efficient, quicker and straightforward, with a higher proportion of suppliers choosing to participate.
Similarly, better market awareness of the potential complexities of setting up a programme, particularly cross-border, means that companies are better prepared. For example, there is often a large number of stakeholders involved across different departments. A supplier finance programme might include procurement, treasury, IT, accounts payable, legal and tax, with the number of parties increased significantly where some of these functions are decentralised. As each of these departments needs to be engaged, share objectives and priorities, and allocate the necessary resources, senior management sponsorship is essential in ensuring that objectives are aligned and organisational roadblocks are avoided.