• 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 19, 2014 by: CashPerform

    Working Capital Optimisation Minimizes Operational Risk Through Strategic Governance

    When tackling cash management issues the challenges can be broadly identified into two categories of Governance.

    The first category is rule based Governance. The rules for working capital could be for:

    Suppliers-Pay according to the agreed payment terms

    Debtors- Chase according to their overdue amounts

    Stock- Replenish according to the SKU parameters

    Work in Progress- Incur costs as allowed by systems and invoice according to accounting guidelines i.e. as laid down by SSAP9 Percentage of completion accounting

    The second category is through subjective Governance. The process of establishing working capital could be for:

    Suppliers-Pay according to a dynamic discounting,  supply chain finance programme.

    Debtors – Pre-emptive progressing followed by default analysis

    Stock-value is determined after establishing disposal costs

    Work in Progress- value is driven by establishing actual cash flows

    Both categories of Governance (Rule based and Subjective) require strategies that require C Level buy in however the more adaptable, agile and flexible organisations normally require a subjective approach which in turn requires delegation of the overall strategy to operations and purchasing functions.

    Whereas the rule based Governance of working capital can be delivered by ERP systems the subjective Governance requires management of each ‘link’ in the process of the financial supply chain.

    Let’s take the example of a strategy that calls for suppliers to be paid later therefore increasing Days Purchases Outstanding (DPO) and therefore ensuring cash is held for longer in the customers bank accounts.

    The usual traditional approach would be to instruct the payables function to delay payment runs or reduce amounts to suppliers.

    The new subjective approach is to appreciate and understand the creditors ledger by way of categorising suppliers by ‘value of risk’ associated with not paying them their due amount on the agreed date.

    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 5, 2014 by: CashPerform

    Suppliers? Why your credit limit needs credit managing.

    Recent figures reveal a huge surge, up by 32% to circa £2billion, in alternative financing outside of the high street banks. Corporates are applying supply chain finance (SCF) programs and many other suppliers are using everything from personal mortgages to crowd-funding to keep their businesses viable.

    The suppliers utilising SCF programs are reviewing credit limits to ensure timely payment of invoices whereas the suppliers using crowd-funding and other platforms are using their supplier’s invoices to fund their expansion programs.

    Credit controllers should be credit checking suppliers on a regular basis, but they will need to interrogate management accounts and the management team to obtain the detail behind their suppliers funding arrangements. This could cause internal credit limits to be driven by subjective analysis, so care needs to be taken to include sales, procurement and even board level directors, as the organisations strategy could be at risk.

    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 11, 2014 by: CashPerform

    Overtrading? Then request more cash?

    With certain sectors and areas of the UK economy growing quite rapidly many businesses will be attempting to satisfy a growing order book without having the financial resources to do so.

    This will result in overtrading as their working capital becomes so stretched that eventually part of the financial supply chain will collapse leaving customers without their goods and services, suppliers without their cash and therefore liquidation could soon be the next course of action.

    So what can you identify in the financial supply chain that acts as an early indicator that cash is becoming scarce?

    Firstly payments of expenses/wages/salaries increase quite rapidly. This can lead to more orders being ‘won’ however to satisfy those orders one might need to commit to placing large supply orders on suppliers who themselves duly ramp up their ordering.

    Because of the terms and conditions of sale and purchase not being ‘measured, monitored or managed’ one might find that payments to suppliers are required before cash is received from customers.

    Then as services deteriorate or goods do not arrive, customers start to withhold payments.

    This is the cash conversion cycle at its ‘breaking point’ and when faced with such scenarios attempting to go to the bank, investors to obtain new funding arrangements could be a recipe for disaster.

    The solutions are numerous and it will be depend upon timing re seasonal markets, possible sector scenarios, attempting to negotiate earlier payment terms from customers, extending payment terms to suppliers, requesting more investment etc.

    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

    So why are corporates/SME’s hoarding billions in cash accounts across the globe?

    Recent evidence suggests that ‘lessons have been learnt’ from the 2008 and the on-going financial crisis re Libor,  FX, PPI miss-selling and in Europe the failure to agree on the way forward re SEPA, EMIR and even bank funding (Germany announcing that the proposals are not ‘legal’

    Cash hoarding continues to occur as trust in banks, the uncertainty of world politics, social unrest in the EMEA area, China’s credit crunch and the US Fiscal Cliff being ‘delayed’ is making businesses prefer this option.

    Furthermore it provides them with the strategic agility to cover shortfalls in operational cash flow that may occur say due to suppliers being affected by natural disaster or where CAPEX may be needed to secure say new premises as the old ones have been affected by say flooding.

    Businesses with cash can also satisfy shareholders demands for dividends, undertake buybacks (Think Apple in the past 6 months) and develop internal growth programmes re R & D or even develop an M & A target without tapping into the banking/financial system (think Facebook’s acquisition of WhatsApp this week)

    Credit Management and the DSO lagging indicator

    Recently, several credit agencies have elected to reflect their own and quite subjective view on whether a company has a good credit history and by taking other factors into account like suppliers scores they have generated ratings that portray, for example, good or very good credit worthiness.

    The DSO metric assists in an understanding of the tracking of debtors but does it really help to understand the organisations ability to pay its bills or support its customers on a sustainable basis?

    I suggest that one requires a narrative that explains how sales are generated, why cash may fluctuate and a fuller appreciation of the commercial terms of the business.