• Posted on: May 27, 2014 by: CashPerform
    • Q)The Forum of Private Business claims that SCF should not be used as a cover for extending payment terms, as “it is a cost”. But wouldn’t receiving payment – through the SCF scheme – within 10 days rather than 60 mitigate, at least to some extent, the cost of that credit?

    A)The challenge for the ‘corporate’ is to identify the ‘critical suppliers’ and then identify a reasonable discount scheme ….but by company or certainly type of supplier i.e. logistics, marketing etc. This is poorly done by most corporates in my view as they do not value or ‘risk review’ suppliers properly.

    To apply a SCF scheme across the board can hurt the corporate and the SME as the margins of many SME’s are so small they cannot absorb a discount of any sort and if ‘included’ in the scheme they then find margins in the future decline and then go bust leaving the corporate without a critical link in the supply chain.

     

    • Q)Isn’t SCF a good thing for small suppliers, or does it depends on the type of solution and how it is used?

    A)Yes, as stated above PLUS credit is becoming scarce and very expensive per latest B of E reports and very little working capital  funding is coming through to small suppliers from banks.

    These small suppliers are now supported by a multitude of unregulated ‘funders’ from pension schemes to platform providers to crowd funders, to family members, to challenger banks to wealth management schemes….the list is endless but so much RISKIER for corporates to understand.

     

    • Q)Secondly, do you think that negative perceptions surrounding SCF might be hampering wider uptake, making it more difficult for corporates to on-board some suppliers? Are there any other factors at play here?

    A)As you say , wider uptake has ‘stalled’ by the ‘unregulated’ nature of the ‘investors’ to smaller suppliers and corporates are taking risks (hence credit insurance has risen dramatically and is ‘cheap’ compared to pre-crisis 2008.)

    The other factors at play here is the ‘quality of the invoices being used’ for the SCF process. With e-invoicing and other ‘checks’ NOT being implemented by UK business one has to ask the question ‘Is the invoice quality paper or toilet paper?’ In other words can it be validated? Can you ‘risk’ loaning money against it?

    This is reverse factoring abut factoring has specific safeguards that SCF has not yet covered.

    The next cash and credit crisis is just around the corner I am sorry to say as Charlie Bean (deputy Governor of Bank of England) pointed out in his exit speech over the weekend when he forecast interest rates rising sooner rather than later to 3%….six times their current level!!!

    Posted on: May 6, 2014 by: CashPerform

    A fast growing business requires working capital. However one also needs to satisfy dividends to shareholders, repayment of loans and even large value capex items…..and even consider cash for merger, disposal or acquisition.

    So does one tackle inefficiencies in the financial supply chain or obtain greater loans, extensions to current debt or ask shareholders for more cash to ensure the business can meet its on-going growth strategy?

    This balancing act requires careful management through scenario planning and not paralysis by analysis.

    Posted on: May 1, 2014 by: CashPerform

    Quality paper not toilet paper

    Recent experiences have shown several organisations crunching numbers and attempting to make the year-end revenues ‘fit’ through generation of somewhat suspect invoices.

    I say suspect in that the invoices are rushed out the door only to be returned due to:

    a)      Missing vital purchase order information

    b)      Incorrect bank account numbers entered

    c)       VAT calculated improperly

    d)      Customers address incorrectly stated as taken from the wrong database

    e)      Invoice number sequencing duplicated

    These scenarios not only caused a delay in payment but also damaged the reputation of the sales/credit function. Furthermore it has caused some customers to question the professionalism of the company concerned.

    Another repercussion was that two organisations were using the trading platforms of companies providing supply chain finance so now their lending facility has been adversely affected too.

    Posted on: April 10, 2014 by: CashPerform

    Invoices need to be Quality paper not Toilet paper

    When looking at the supply and demand chains within the both the physical and financial supply chains one can see that the pace of technological advancement in accounting and treasury functions over the past few years has outstripped the processes in pace.

    In other words there is an argument that solutions are now often leagues ahead of what processes can actually achieve.

    Back to basics is required in that the acronym TALC© where T is for timeliness of invoicing, A for accuracy of the invoice re computes correctly, L for Legitimate – in that it meets with all countries legal requirements and C for Compliant – where it reconciles to the good received note, purchase order , milestone criteria should be applied with rigour and in a robust manner.

    An invoice becomes a financial instrument of repute if TALC© is applied throughout the organisation.

    Supply Chain Finance (SCF)

    Corporates support their suppliers with access to early payment, mitigate risk in their supply chains, manage creditor payment days, and enhance return on capital.

    How SCF could work:

    Step 1 Your suppliers deliver goods/services and invoice your company as normal.

     Step 2 Your company approves the invoices.

     Step 3 Your company either sends to Finance Provider:

     a)    a file of all approved invoices, by supplier, with the same settlement date.

     b) Individual invoices when approved.

     Step 4 Finance Provider launches the trade and institutional investors fund the trade.

     Step 5 Finance Provider pays suppliers the day after the trade closes.

     Step 6 On the settlement date, your company simply pays the full amount due to each supplier to Finance Provider, which distributes the funds to the investor base.

     Possible Benefits to Corporates

    A)  Assist suppliers with working capital management thereby helping to stabilise your supply chain.

    B)  Opportunity to negotiate better prices and payment terms.

    C)  Reward key suppliers for service excellence.

    D)  Create access to new supply sources or regions as suppliers may now choose to supply your company safe in the knowledge that invoices can be settled within days, not weeks or months.

    E)   Utilise your company’s favourable credit profile to assist the procurement function.

    F)   Maximise financial stability within your supply chain.

    G)  No costs to your company to implement Supply Chain Finance.

    H)  Enable your suppliers to obtain cash without using your company’s own liquidity, if you don’t want to.

    I)    Opportunity to negotiate better prices, improve payment terms and even extend payment days, thereby enhancing your company’s working capital position and reducing your net interest charge.

    J)    Opportunity for your company to participate as a possible investor if you want to, i.e. your company could invest in its own invoices as an enhanced treasury and liquidity investment.

    K)  No finance costs

    Possible Benefits to Suppliers

    1) Improve operating cycle by turning receivables into cash much more quickly.

    2) Generate the potential for increased sales with your company as quicker cash facilitates quicker trade purchases further down the supply chain.

    3) Pricing is based on your company’s credit profile and not that of your supplier.

    4) Receivables are carried for a shorter period of time.

    5) Increase the advance rate against receivables to 100% for your suppliers who otherwise borrow on a percentage, typically limited to 80% or less.

    6) Mitigate concentration risk in receivables that your suppliers may carry if your company represents a significant percentage of their sales.

    7) Transaction costs are 100% transparent and known up-front, based on the payment term.

    8) Suppliers have complete flexibility and can opt in and opt out on a per invoice basis which means there are no lock-ins, security charges or debentures.

    9) Little or no impact on your credit rating

    10) No loss of control through dilution of equity or increase in debt.

    11) No IT costs

    12) No legal costs

     

    Posted on: March 6, 2014 by: CashPerform

    Which finance provider should I use?

    A frequently asked question and one that requires a very lengthy solution although the following is a distillation of 8 years’ experience  and its simplicity never fails to surprise me as few ‘advisers’ undertake each category with the granularity and due diligence needed to deliver a reasonable conclusion.

    What is the organisations strategy and how does it relate to cash flow?

    Review sector, the market, aspirations of trading abroad, growth- organic and through diversification. Does ‘segmentation’ really mirror cash flows?

    What does the business model/operational plan reveal by way of cash ‘streams’ and the cash conversion cycle i.e. monthly DD, quarterly invoicing , contractual milestone payments, performance costs and revenues?

    What is the underlying performance of cash and how is it driven by KPI’s? Is working capital optimised and the interdependency of the demand/supply/inventory and investment chains fully understood and appreciated? Are people driven metrics linked to cash flow?

    What is the ‘risk appetite’ of the Board? Is it sustainable? Have external drivers been factored in via probability, scenario planning and risk mitigation?

    Conclusion.

    Once the above has been undertaken what sort of finance is required?

    Short Term – possibly reflecting efficiency or otherwise in the CCC

    Medium Term – is the operational plan reflecting the 4 ‘interdependent chains’ of WCO?

    Long Term – Is the strategy ‘wrong or right’?

    Narrative around the ‘providers of finance’ can now begin as one will understand ‘timing’ issues, it will identify whether opex, capex or M & A/Divestment  is required and the whole financial supply chain is now being, measured, monitored and managed.

    Alternatives, to traditional bank funding for working capital, requires due diligence

    With Basel III restricting banks credit facilities the tide of alternative providers is rising as they can deliver competitive costs of finance, pay as you go transactions, no charges or notice periods on the business, no personal guarantees, and are transparent to you as the customer plus your customer (the suppliers) do not need to know of your financing of their payments.

    If you have a cash conversion cycle that is both efficient and effective then alternative finance providers may be a good place to start rather than using personal mortgages, savings and/or credit cards but as they say ‘caveat emptor’ as due diligence is key.

    Furthermore one needs to fully understand your Weighted Average Cost of Capital (WACC) and whether current and future business trends will support such a strategy

    Posted on: October 23, 2013 by: CashPerform

    With the skill set of a credit manager I have often implemented a cross functional approach whereby credit management is applied to both an organisations customers and suppliers.

    Why?

    Well a supplier who invests time, resource and therefore cash in supporting you may in fact be critical to your very existence. However if you do not appreciate that particular suppliers financial situation at any given point in time, one might make decisions about payment or procurement matters that actually causes the financial collapse of that supplier with obvious repercussions for the business, yourself and your/ its customers.

    Posted on: October 4, 2013 by: CashPerform

    Financial versus physical supply chain a new accounting process

    The financial supply chain is often referred to as being the process of managing the efficiency and effectiveness of the whole working capital ecosystem.

    However the introduction of CAPEX into the working capital equation namely DSO+DIO-DPO as well as the terminology being applied by the newly published FRS102 re debtors are classified as receivables and creditors as payables now requires a new accounting process to be established as more working capital funding aspects are involved.

    There is also a whole new investment strategy being played out by corporates that impact SME’s namely supply chain finance programs like dynamic discounting and furthermore there is the intervention strategies being developed by major players like Sovereign Wealth, Pension Funds as well as the likes of MasterCard and PayPal that can leverage payment platforms to supply working capital funding.

    Add to this the threat to the main banks from the likes of Basel III re capital adequacy tests and the banks lack of focus as to whether to deliver commercial/mortgage type funds to you rather than to support riskier business ventures with their greatly reduced capital funds.

    I therefore propose that the new financial supply chain is renamed as the financial supply process which links the whole working capital and capex chain to the funding requirements of the business.

     

    If we take receivables the process is from the point of identifying a market, thru sales, thru delivery, customer satisfaction to invoice processing, receipt of cash, posting and reconciliation to all accounts.

    The physical supply chain for receivables is the usual Order to Cash process that sits within the credit control and accounting function in most businesses and is where debtors are part of the physical collection system

    If we take payables the financial supply process would embrace the approval of suppliers via procurement following a strategy that reflected and followed the strategy accomplished by marketing and sales in the pursuit of their targets (including stock and work in progress) plus the businesses capex strategy. These suppliers would eventually become creditors and would be subject to payment in accordance with their individual terms and conditions which themselves would be aligned to funding streams namely operational cash plus short/long term working capital funding streams.

    The business itself would be driven by working capital/capex models that reflect the mix of products, projects and service areas within the business. The strategy being the development of the cash rich areas (current as well as envisaged ) to satisfy stakeholders interests namely creditors, employees, investors, and including future options regarding growth like merger and/or acquisition or disposal.

    Cash conversion cycles are critical as they provide views on liquidity as well as optionality with regard to strategy. The Boston Consulting Group Matrix re Cash reflected such matters in the 1970’s

     

    A top level example of cash flows and working capital cycles are on a  separate power-point presentation that can be provided upon request.

    Please note the project cycle applies to contract projects in sectors like construction as well as for internal Capex projects and can be applied to marketing, research and development expenditures as they could have projects as defined strands to meet certain strategic goals. For instance market penetration into a new geographical area like Europe could have specified cost, sales and capex criteria within a milestone driven project.

    Finally we need to address the reporting of the new financial supply process. With integrated reporting, future statutory requirements and the need for transparency and good governance around cash re going concern concept the new process identifies the whole cash chain ‘cradle (cash inception) through to grave (cash collection and reconciliation).

    The new financial supply process will map the processes and within its structure highlight the ‘physical touch points’ like invoice raising and invoice receipt as well as map it through to the funding requirements of the business.

    The business can then establish whether it will require short term or longer term funding, or whether it can pay dividends, afford share buy backs, afford M & A, afford pension fund contributions etc.  or a mixture of all these to achieve the strategy.

    ©Copyright John Mardle CashPerform Ltd October 2013

    A working capital strategy that changes functions into financial management chains.

    A demand driven supply chain seems like a perfect scenario that seems to imply that one can meet the demand from customers through an agile and robust supply chain. However, to achieve this utopia one may well require perfect data and perfect timing which we all know cannot be fully achieved hence the need in some cases re products for stock and for projects and services the requirement to record work in progress.

    We have therefore moved from a sales function demand chain and procurement function supply chain, to involve the financial function. Furthermore we have not fully addressed the financial transactions required to manage the many cash aspects regarding receipt of cash from customers or payment of cash to suppliers.

    It has long been recognised that the whole supply chain from backlog, thru procurement, purchasing and payment (P2P) has the greatest threat to an organisations cash flow in the longer term hence this requires CAPEX and working capital funding through a supply chain financing product that bridges the funding chasm.

    The backlog, newly placed orders to cash receipt chain (O2C) is about internal controls that can be adapted to deliver transaction efficiency that can require management  in the short term but only through trade finance programmes like invoice factoring that can prove costly.