Corporate TreasuryFinancial Supply ChainCorporates Focus on Increasing Ownership and Liquidity, Minimising Risk

Corporates Focus on Increasing Ownership and Liquidity, Minimising Risk

There has been increased advocacy of ownership of the financial supply chain (FSC) in recent years and it seems that some companies are listening: a dedicated FSC manager is needed for effective risk and liquidity management in the supply chain. In 2010, 25% of respondents said that FSC management was scattered across the organisation – by 2011, this figure was down to 16%, while the percentage of companies with a dedicated supply chain manager rose from 28% in 2010, to 31% in 2011.

The survey results clearly indicate that 60% of companies are now placing the FSC under the control of treasury, the chief financial officer (CFO) or a dedicated supply chain manager, while 78% of them expect the FSC to come under their responsibility in future.

According to Patrik Zekkar, head of trade and supply chain finance for Sweden at SEB, this kind of holistic approach to FSC management is instrumental to reducing risks and avoiding disruptive supply chain events.

“Of course, treasury needs to have a larger say in the supply chain process,” says Zekkar. “Treasury needs to take responsibility, so that, for example, no one in procurement signs off on a contract without treasury sign-off. This will help to get the whole organisation working towards the same goals and priorities – that can save the company a lot of working capital and bank credit lines. Overall, companies are increasingly working in this way, but now treasury has to pro-actively set the prerequisites for how the company’s cash flows should be structured, rather than simply executing scheduled transactions in the best possible manner.”

Although 16% still have responsibility for the FSC ‘scattered in the organisation’, just 10% expect to maintain this FSC structure in future.

Overall, 32% of the survey’s respondents work in treasury, while 20% of them are financial managers – suggesting that treasury and finance are still often the most directly involved in managing the FSC.

However, SEB’s Zekkar points out that simple ‘involvement’ is sometimes not enough. He says: “Involvement doesn’t necessarily mean that you have an impact. Treasurers and financial managers need to be involved at the decision-making stages of working capital and risk management-related issues, otherwise they won’t have control or strategic planning possibilities.”

Identifying and Mitigating Risks

Risk management in the FSC is firmly at the top of the agenda for FSC managers and corporate treasurers. “This will continue to be a major focus for corporates going forward, which is to be expected,” says SEB’s Zekkar.

The survey found that customer counterparty risk is the most important risk for 46% of the survey’s respondents – more so than supplier counterparty risk, which was important for 39%. The uncertainty of the current economic climate is increasing awareness of the risks involved in counterparties. Zekkar points out: “There has been a pick-up in focus on risk in relation to suppliers as they are a material part of your supply chain and need to be taken seriously when preventing breakage in the supply chain.”

Liquidity risk was deemed the most important risk by 43% of respondents, while foreign exchange (FX) was also considered important by 41%.

Corporates’ perception of risk has shifted from 2010 to 2011. In 2010, 30% of corporates chose operational risk as their most pressing threat – while just 27% named customer counterparty and FX risks as their most important risk areas. These results correspond with the events of the past 12-18 months, which have seen increasing uncertainty in the financial systems, particularly in Europe. FX volatility and the increasing cost of bank credit have left corporates looking for other sources of liquidity and with that, an increased focus on risk in the supply chain.

Operational risk is still foremost for corporates in Asia-Pacific and the Middle East/Africa: 55% and 50% respectively ranked operational risk as their biggest concern, while half of respondents from Asia-Pacific also named sovereign risk as a major consideration.

Many of the respondents named other important types of risk that included commodity prices, bad weather, bank counterparty risk, regulatory compliance, and technology disruption.

Bank Support for Counterparty Risk

Almost half (49%) of the respondents feel there is room for improved support from their banking partners in the area of counterparty risk management (for both suppliers and customers). This shows that companies are in need of services and banking products that provide visibility into the financial supply chain – but that also provide a buffer in the form of risk mitigation between buyers and suppliers.

Sixteen percent of the survey’s respondents believed their banks could offer better services for FX risk management, while 15% think there could be improvements for operational risk management support from their banks.

Looking Out for Liquidity

The focus on risk in the FSC is closely followed by concern with maximising liquidity – and indeed mitigating liquidity risks. “The survey highlights the complicated world of risk. It’s an issue that affects liquidity, as seen in the corporates’ preference of keeping a higher ratio of total assets on their balance sheet. This is a strong signal of concern about liquidity risk in the financial supply chain,” says Zekkar.

The survey asked about the optimum amount of cash, as a percentage of total assets, which corporates should have on their balance sheet. In 2010, 41% of corporates believed they should ideally hold between 0%-9% of their assets as cash on the balance sheet. But in 2011 there is a different story, with corporates preferring to hold a larger percentage of cash on their balance sheet and just 35% choosing the 0%-9% range.

Zekkar says: “This shows corporates now want to hold a higher liquidity cushion, to mitigate short-term disturbances in the supply chain as a consequence of potential limited access to liquidity.”

In 2011, 60% of corporates globally believe that 10%-50% is the ideal amount of cash to hold (46% chose the 10%-25% range, 14% chose the 25%-50% range). In 2010, 52% indicated that 10%-50% was the ideal percentage of cash to retain on the balance sheet.

By region, western European corporates are most likely to hold less cash on the balance sheet (41% believe 0%-9% is the optimum cash level), while half of Middle East/Africa corporates believe that the higher range of 25%-50% is ideal.

Value on the Balance Sheet and in the Supply Chain

The majority – 54% – said that the scarcity of capital in the past year has increased their focus on the balance sheet and on the supply chain. However, there are regional variances in the pattern of companies showing increased focus on the balance sheet or the supply chain – 80% of companies in central and eastern Europe (CEE) said their focus had increased, while 75% of companies in the Middle East/Africa also said so. Less than half of companies in North America said their focus had changed.

The survey results suggested that smaller companies are more concerned with finding value on the balance sheet or in the supply chain. Of companies with revenue under US$50m, 67% said their organisation will focus more on the supply chain and balance sheet before using bank overdrafts or loans. Forty-six percent of companies with revenue greater than US$10bn said the same.

“This is interesting – of course small companies are more concerned,” says Zekkar. “They have more need to look internally for liquidity. This is also linked to the growing adoption of SCF programmes, which also free up liquidity.”

The survey found that 37% of the respondents said that ensuring liquidity was the primary focus of their working capital management strategy. Twenty-one percent chose the release of tied-up working capital.

Efficient Forecasting and Planning

One of the main challenges for efficient liquidity levels is forecasting and planning – both of which can be improved with increased control and data visibility in the FSC.

Forty-two percent of the companies polled said forecasting and reporting were their main working capital management challenge. When asked about the main challenge in overall liquidity management, 46% of respondents said it was forecasting and planning.

Zekkar says: “This really shows that ownership of cash positions is essential. Without accurate and timely data – preferably through integrated interfaces – treasury will face difficulties in forecasting accurate trade and cash flows.”

SCF Programmes

When asked how companies are planning on using the possibilities in the balance sheet in future, the results showed that 45% of companies are considering the launch of a SCF programme, reflecting the increased interest in SCF instruments in general. Compared to 2010, there is more interest in SCF programmes (up from 37% in 2010), while interest in ‘leaner management of the supply chain in general’ decreased from 59% to 35%.

Zekkar says: “There is growing interest and awareness of the possibilities and benefits of these SCF programmes. However, setting up a SCF programme is an expensive process. Big corporates can afford this but it’s not easy for small and medium companies – and they are the ones that could benefit most. Furthermore, banks haven’t had a real appetite for accepting SMEs as buyers with the unsecured risk that entails.”

SCF programmes have several benefits for corporates, including:

  • Extending payment terms to suppliers (banks buy receivables, allowing both buyer and supplier to enhance their liquidity positions).
  • Strengthening your suppliers, and enabling them to get access to funding.
  • Diversifying funding sources.
  • Outsourcing processes (such as reconciliation) that would otherwise be done in-house. The bank can take on that role, thereby minimising the discrepancy rate.
  • Reducing risk by keeping finances at a healthy level for suppliers, while at the same time cementing the buyer-supplier relationship by providing financing contracts, making a break-up of the relationship less likely.

Protecting Against Breakages

SCF programmes affect various departments across the company including procurement, ledger management, logistics, cash management and treasury. “This means that corporates have to align their targets across the company’s different functions,” says Zekkar. “Where there is lack of ownership and split responsibility for the FSC, which is typical in larger corporates, there is a higher likelihood of supply chain breakages. This is often the reason why SCF programmes don’t materialise.”

“The use of different payment instruments or different payment terms for different clients, for example – this fragmentation is also due to lack of ownership. Companies aim to reduce costs, and it’s far more efficient to decrease irregularities, rather than allow sales to sell more but then have to manage different payment instruments and terms,” explains Zekkar.

The survey found that 58% of the corporates polled have experienced a supply chain breakage event in the past year. Delay to projects/strategy implementation was the result of the breakage for 22%, while for 21% the breakage lead to them losing customers – significantly more than in 2010, where just 12% said they lost customers as a result of a supply chain default. A higher cost of capital resulted for 16%.

Supply chain breakage events are far from being equally distributed across different regions – 81% of companies in Asia-Pacific say they have experienced a breakage in the past year, compared to 50% of North American companies.

L/Cs: Alive and Well

The survey found that 43% of the companies polled use letters of credit (L/Cs) for mitigating supplier and customer risk. Zekkar says: “L/Cs still have a future and treasury is increasingly taking responsibility for this area of trade finance. It is a flexible instrument without high costs and can be a useful form of customer financing.”

Forty-three percent of companies also use guarantees to mitigate buyer risks (36% for supplier-side risks), while 40% use credit agency scoring to mitigate their supplier risks (26% for buyer risks).

For open account trade on the other hand, 43% of those polled said they use factoring and supply chain financing to mitigate risks on the buyer side. Thirty-eight percent use buyer insurance to mitigate their buyer-side risks.

BPO and the Integration of Trade and Cash

Zekkar believes that open account trade will take a great leap forward when the standards for bank payment obligation (BPO) are finalised in 2013. He says: “I have great hopes for the BPO – it will be a very flexible instrument, and can be used partly for L/C trade as well as to create liquidity in trade done on open account.”

He believes it will also take trade finance a step further towards integration with cash management. “It will be important to integrate trade and cash; this hasn’t really happened yet. If companies are financing trade with L/Cs, with BPO and with SWIFT cash and trade channels, they will need to process these in the same back office. The instruments will be processed in similar ways, so the departments of trade and cash will also be converging.”


Several themes were highlighted in the 2011 Financial Supply Chain Survey, the foremost of which is the importance of risk management in the FSC. This is now a major concern – customer counterparty risk in particular has become a greater perceived risk. The importance of maximising liquidity on the balance sheet was also highlighted and, while companies are now choosing to keep a higher percentage of cash on the balance sheet, they are also looking for other ways of freeing up liquidity, for example through SCF programmes.

The survey also served to highlight the shift towards a dedicated financial professional taking overall responsibility for the FSC – this would be an important organisational change that will also help to prevent costly supply chain defaults, which often result in loss of customers and revenue. Together with a more holistic approach to the FSC, there is also the hope that trade finance processes within companies will in future become more integrated with cash management, driven by the developments in BPO. A holistic approach together with integration with cash management will enhance visibility, forecasting and control of the FSC.

About the survey
The gtnews 2011 Financial Supply Chain Survey, sponsored by SEB, was conducted between 18 November and 16 December 2011. It polled 126 corporates, 37% of which were based in western Europe, 26% in North America and 21% in Asia-Pacific. Central and eastern European (CEE), Latin American and Middle Eastern/African respondents made up the remaining 16%. Thirty-two per cent of respondents came from companies with annual revenues of US$50m-US$249.9m, while 25% came from corporates with revenue of US$1bn-US$9.9bn. The highest proportion, 29%, of respondents came from the manufacturing industry.

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