The global financial crisis caused a seismic shift in the way businesses operate and finance themselves. Much has been written about the impact it had on the role of the corporate treasurers, as boards of directors look to them for their company’s financial health. Whether it is managing risk, optimising working capital, gaining visibility of receipts and payments, understanding where a corporate’s cash lies, or creating more robust processes and controls, the treasurer’s role has seen a dramatic evolution.
Renewed Focus on Counterparty Risk
The importance of supply chain finance (SCF) should not be overlooked in its contribution to serving an organisation’s objectives. From facilitating the realignment of their sourcing strategy to potentially extending payment terms and preserving working capital, it offers the flexibility to selectively deploy cash. This can then be used for early payment discounts, reducing procurement costs or directly supporting suppliers in gaining access to a less expensive source of financing as part of their sustainability initiatives.
Throughout the supply chain process, multiple suppliers, buyers and other counterparties are engaged at each stage of an organisation’s operating cycle. However, not fully realising the hidden risks within this process provokes huge concern and uncertainty for every company involved. As we saw during the crisis, counterparty risk became a huge issue, endemic throughout business, which significantly impacted international trade. Today, the impetus to spread risk is driving corporates to take extraordinary measures when selecting counterparties, choosing alternative partners and even reversing the trend of consolidating the number of banking providers across a region.
While the financial crisis exposed flaws in the robustness of supply chain counterparties, recent natural disasters, such as the Japanese tsunami, continue to demonstrate the fragility of the supply chain. Where global trade has predominantly moved towards open account transactions, banking solutions such as SCF (otherwise known as ’supplier finance’ or ’reverse factoring’) and receivables discounting have become key risk management tools for corporates to help them better manage the impact of these unforeseen events, giving treasurers the ability to address risk throughout the supply chain.
The Emerging Role of the Treasurer
Today, the treasurer is pivotal to finding and unlocking the potential of new solutions to manage the risk of their business around the world, going above and beyond a traditional funding capability. For example, receivables discounting was previously part of the treasurer’s focus in their interactions with banks, whereas today we see the treasurer also taking the lead in sourcing other working capital optimisation solutions such as SCF.
Some treasurers place greater emphasis on maintaining adequate levels of cash without the need to stockpile further cash reserves, while others welcome innovative solutions that enable them to generate more cash for their organisation. Increasingly, treasurers are also engaged with procurement to manage sustainability challenges in their supply chain, as well as driving the strategy towards the management of the corporate’s working capital.
Many are also relying on SCF as a solution to improve working capital metrics and generate extra cash from an organisation’s operations cycle. The benefit is that it can do so with minimal impact to purchasing conditions with the supplier base and in most cases, provides added value to these suppliers. Suppliers can draw on this alternative way of financing their working capital at potentially less expensive rates than they would otherwise get on their own merit in their home geographies. This is particularly the case when located in emerging markets which generally command higher pricing for financing. For leveraged suppliers, SCF is an excellent way to help them in their financial management and therefore serves to mitigate the sustainability risk of the supply chain.
Synchronising Corporate Supply Chain Goals
As decisions regarding the monetisation of receivables are primarily driven by a company’s credit appetite for their customers and the need for cash flows, the implementation of receivables finance solutions does not require much involvement from the broader organisation. When it comes to SCF, however, procurement and accounts payables (A/P) have a vested interest in how the solution is deployed as it can impact their day to day responsibilities and performance. Most recently, we are seeing treasurers taking the central role in this step change for the broader organisation in order to optimise their working capital.
The virtue of SCF lies in its ability to be tailored towards the specific needs of each organisation, and it is here that the treasurer’s role is pivotal to success. This can only be achieved if the different goals throughout the process are recognised and addressed by deploying a flexible solution. For example, the procurement strategy for every product set or geography may require each segment of their supplier base to be addressed in a different way. For example, some suppliers may be offered more attractive financing rates and different fee structures than others, along with varying payment terms.
Importantly, the solution should cater for different currencies and languages, and be accessible and user friendly to ensure the smooth running of the underlying business. In today’s world where corporates are expanding their global footprint and sourcing directly from manufacturers, their suppliers are also spread around the world. Geography and scale of operations are obvious reasons for choosing a global provider. However, such a provider can also help guide the corporate in managing its multiple stakeholders to ensure standardisation, organisational alignment and buy-in.
To deploy a programme that will maximise the objectives of treasury, procurement and A/P, it is important that a single solution is deployed across the globe. Given that there are only a handful of truly global banks, treasurers are challenged with finding a single provider that can deploy a scalable and flexible solution through a partnership approach, with minimal costs and maximum efficiencies.
Managing the Supply of Credit
For large organisations that are interested in extended payment terms for a significant portion of their suppliers, the credit requirement could be beyond that of a single bank’s appetite. For example, typically, an organisation with £1.2bn of purchases would have payables of £100m if they are operating on 30 days payment terms. By moving from 30 to 60 day terms, an additional £100m could be generated out of the operating cycle. When supported by a supply chain solution that promotes the extension of payment terms, the bank providing this solution may need to provide funding of up to £200m, depending on adoption of the programme by suppliers and the time taken by the organisation to process and approve invoices.
Such credit requirements can be efficiently managed in a number of ways and we are seeing the market evolving towards risk distribution and multi-bank models in order to accommodate the global breadth of supply chain programmes. Relying on multiple funding providers for a single global programme serves to facilitate a more standardised approach, irrespective of location.
In the multi-bank model, treasurers are key to the selection of the funding partners and can leverage their banking relationships to get the best rate for their suppliers through this solution. More importantly, they are best placed to assess whether the funding solution proposed by the banking partner will meet the future needs of the SCF programme. Treasurers should also ensure that the solution has the flexibility to accommodate the withdrawal of credit by any single bank without causing disruption to the supply chain.
As the engine behind the supply chain finance initiative, the treasurer needs to ensure that every part of the organisation contributes to the overall objectives, from procurement through to accounts payable, in order to deploy the right solution. Post crisis, the treasury function has become best placed to understand the financial needs of the corporate and consequently, can actually drive the solutions that dictate the structure of their supply chain. In today’s increasingly global world, it must be scalable and standardised, irrespective of supplier and geography, at the lowest cost to the client. The supply chain must also offer adequate flexibility to accommodate any change in funding the provider without disruption.
Today, the treasurer is pivotal to unlocking the potential of a plethora of new solutions to manage the risk of their business around the world, going above and beyond a traditional funding capability.