• 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 10, 2014 by: CashPerform

    Releasing trapped working capital is simply reviewing inefficient processes, whereas Working Capital Strategy is more about delivering an effective financial supply chain.  This means being proactive in areas from strategic alliances to delivering efficiencies in the cash conversion cycle.

    Working Capital Strategy checklist

    Ten tips when reviewing a strategy to achieve working capital optimisation:

    1.   Working Capital Optimisation programmes must extend beyond the finance function and engage the company’s entire managerial team.  Do not think that all working capital management problems can be addressed by treasury alone. Appoint local working capital strategy leaders/champions across the organisation.

     

    2.   Do not artificially adjust working capital levels through delaying payments to suppliers or indiscriminately stepping up collection activities in order to boost quarter- or year-end performance metrics.  In business, as in physics, every action is met with an opposite reaction.  Delaying payments to vendors may reduce working capital over the short term, but that improvement is likely to disappear over time as vendors adjust their pricing accordingly. Dynamic Discounting is now prevalent.

     

    3.   Incentivise people to achieve their WCO targets by compensating staff accordingly, particularly at managerial level. User driven key performance and risk indicators should be measure the underlying causes of DSO, DPO and DIO and steps take to monitor and manage findings.

     

    4.   Make a consistent effort to optimise working capital.  It may be tempting to take the focus away from working capital when the company is growing as there may be less immediate need for it.  Equally, in times of crisis, attention can be diverted elsewhere.  Ignoring working capital could significantly inhibit a company’s ability to grow and meet demand once business rebounds.

     

    5.   Ensure all hopes are not pinned on ERP implementation.  Although ERP systems can provide significant benefits in the working capital arena, in the near-term they can cause deterioration in working capital performance as key managers and employees are distracted from their daily routines and forced to fine-tune the new ERP system. Mobile applications are proving robust and agile.

     

    6.   Ensuring suppliers and customers are collaborating effectively is now very much to the fore in demand chain management.  Connect suppliers and customers across the enterprise to achieve maximum benefits.

     

    7.                  Provide added value for your suppliers.  Major organisations are now using web portals and the like to   deliver seamless accounting transparency for all their suppliers and their financial transactions too, wherever they might be in the world. Supply Chain Finance is now a major part of suppliers funding arrangements.

     

    8.   Do not allow debt to become overdue before identifying and resolving disputes.  Contact customers before payments are due to resolve any potential disputes and for delinquent payments, assign collection responsibilities to individuals and escalate the responsibility to more senior employees as invoices become further overdue. Have credit management as part of your strategy at Board Level.

     

    9.   Develop forecasting techniques that incorporate intelligence from all relevant business segments, including not just sales but manufacturing, distribution and marketing.  Evidence from these forecasts will assist in the production of company financial statements to investors re Companies Act 2006 as amended October 2013 re Strategy and Directors Report

     

    10. Look holistically at the whole financial supply chain.  For example, is there a direct correlation between inventory management methods and the level of customer service that a company can provide?  Do not allow one area to suffer as a result of focusing attention on another.

    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