“Marketplaces are moving faster and becoming more and more uncertain than perhaps they’ve ever been – and companies are far more global than they’ve ever been before,” says Matthew Stammers, VP of marketing at Taulia, the technology-led working capital solutions provider. “The ways in which companies compete isn’t as a standalone island – they effectively compete as a supply chain network, and if your network fails because it doesn’t have enough liquidity, those results can be disastrous for you.”
Traditionally, businesses have been trying to free up cash on their balance sheets in order to “make their cash work harder by having it readily available to carry out cap-ex programmes, bring debt ratios down and other corporate objectives”, as Stammers puts it. To do so, more progressive organisations have focused on supply chain financing initiatives to provide flexibility to the buyers and suppliers they rely on. In today’s highly competitive global markets, suppliers with rigid payment terms can find themselves in difficult situations: an inability to effectively manage their own cash base can be a question of survival.
The ways in which companies compete isn’t as a standalone island – they effectively compete as a supply chain network
“If you’re a farmer, your supply chain is incredibly important – you’ve got a small number of companies that do very specific things, and you don’t want to disadvantage your supply chain. So it’s essential to ensure that your supply chain has got liquidity,” says Stammers.
By offering early payments to those within the business’s supply chain, an organization can more effectively manage the cash on its own balance sheet while supporting the companies it relies upon, who can choose when to pay. For the buyer, giving their suppliers optionality on when they make payments reduces supply chain risk. The benefits don’t end there, though.
“Firms inject money into their supply chain to improve competitive advantage, and they do that to become customer of choice and enjoy the benefits of their innovations,” says Stammers.
While the benefits are clear, there are still regions of the world where cash and working capital optimization through intelligent supply chain financing are not part of a company’s agenda – although North America, Europe – where low interest rates are having a huge impact on the cost of money – and Asia are leading the way. On a sectoral basis, commodities-focused industries such as farming, oil and gas, utilities, manufacturing and food and beverage, among others, are starting to realize the benefits of intelligent supply chain financing – particularly given the current economic conditions.
Technology steps in
As in many areas of financial services, technology is driving more effective supply chain financing solutions. Taulia provides organizations with a platform that ties together invoicing, supplier management and supplier finance. Within an invoicing portal, buyers and suppliers can see their forward payment schedule. Using a discount rate – based on a standard annual percentage rate (APR) – established the supplier, buyers can select when they would like to make payments according to their own working capital requirements. Suppliers benefit from flexible payment terms and the option of adjusting their requirements, as well as the applied discount rate based on their cash needs now and at any given point in the future.
The solution solves a number of age-old supply chain problems, while being able to plan ahead effectively gets rid of awkward interactions over chasing payments and requesting discounts. The flexibility provided by the system for buyers to arrange their financing needs, however, is where the system really stands out.
“The clever bit for buyers,” says Stammers, “is that sometimes they’ll want to pay early using their own money, meaning they can get more of a discount from the early payment. At other times they’ll want to pay early using third-party money because they’ll want to build up their cash. Obviously companies do that because they have the classic quarter, half-year, year-end reportings so they’ll want to present a strong cash position at that point in time. Or they might be doing something more strategic, such as a big capital investment or an acquisition. The technology gives you the ability to choose.”
While it’s a simple, effective idea, the benefits can really be seen when a firm’s supply chain becomes complex – as it allows for full cash optimization easily, and on a large scale.
And the idea is taking off. Taulia now has well over a million and a half suppliers on its network with the ability to access early payments as and when required. The firm is able to boast Nissan, Vodafone and American Water among its clients, and the list of organizations embracing the technology to improve the way they operate is growing. By means of an example, Stammers points to AstraZeneca, the multinational biopharmaceutical organization.
“They’ve been able to look at how they manage their payment terms and they’ve been able to put a lot of cash back on their balance sheet to fund drug research because they’ve understood that they can’t compete in the market in terms of commodity drugs. The only way they can compete is if they can stand out and differentiate by bringing new drugs to the marketplace,” he says. “And they need to fund that – which they’re doing by looking at how they’re managing their working capital.”