Supply chain finance: a six step strategy for each company to develop a supply chain finance plan
Traditionally, companies have followed a singular strategy – maintain high credit periods (or DPOs – Days Payable Outstanding), where they negotiate longer terms to pay creditors and, in the meantime, use any excess cash available to pay off creditors. short-term activities. Now, while a higher DPO and longer credit period can be seen as beneficial, the pandemic is forcing many businesses to speed up payments to vendors in order to keep them afloat.
According to the PwC study of the world’s largest listed companies over the past five years, excess working capital of Â£ 1.2 billion is tied to global balance sheets and for two consecutive years a 3.8% decline in DPO has been observed. This indicates that using DPO may not be a long-term sustainable approach. This makes it difficult for cash-strapped buyers who have no cash available to pay and therefore need a long period of credit. The only way to solve this problem is for companies to review their entire working capital strategy and cash flow cycles. .
Supply chain finance – An underutilized lever
Supply Chain Finance (SCF) is an underestimated lever for optimizing working capital strategies. SCF is not a new concept. It has been around and practiced for over two decades now. Although some companies have been able to modernize and automate their SCF operations, they still have a unique approach. This method does not solve the problems related to the lack of liquidity. However, other real challenges such as high transaction costs as well as structural hurdles such as paper invoices, the lack of an integrated data flow that can provide real-time visibility into the cash conversion cycle of end-to-end and the lack of organizational guidelines are rarely addressed. That is.
So while most business leaders understand the value SCF provides, its depth remains unexplored. Research indicates that a Fortune 100 company can potentially generate $ 2 billion in additional cash simply by optimizing working capital management, on par with the performance of top companies in the industry.
To achieve such results, every SCF program must align with unique business goals that not only ensure business continuity and production planning, but also play a key role in increasing sales and securing success. high returns without risk.
The main advantages of a well-defined SCF strategy are numerous. It can accelerate sales by injecting capital to distributors, can create a net profit and stretch working capital by extending longer credit periods to suppliers who have the capacity to support the extension, while paying distressed suppliers. before the hour. To enable these benefits, companies must have a unified supply chain and a working capital strategy that is fully aligned with evolving business goals; and seek to modernize practices to achieve large-scale operations in SCF.
A six-step plan for a holistic SCF strategy
- Set up a 5-year working capital objective which will form the basis of the strategy. The objective must have a dual objective: profitability for the company and health, resilience and the capacity for growth for suppliers.
- It is essential for the business to understand its end-to-end supply chain and identify where exactly the working capital is trapped and how much is trapped. Often times, this happens in multiple places – delayed payments by customers, early or excess capital made available to suppliers, or simply, slow inventory – a stark reality of the ongoing pandemic.
- Calculate the potential material gains in each of these places, and cumulatively for the organization as a whole. This will help prioritize areas of action with immediacy.
- Companies need to undertake in-depth risk modeling – this requires delving into vendor specifics such as – how many vendors does the business work with? Of these, how many are financially strong and how many need support now or in the near future. This should also cover suppliers and resellers at the second and third level of the network.
- They must create a data-driven scenario analysis by examining the past business performance of suppliers and their relationships with the company, then create a personalized supplier financing program that is a win-win for the company and the supplier. Likewise, this must be done for all suppliers. Here, companies must also model the plan in such a way that there is flexibility in funding sources, allowing a company to dynamically switch between internal and external funds as needed, ensuring the overall profitability of the company. .
- Businesses need to have a contingency plan in the plan and periodically assess and redefine their approach to suit everyone. After all, an entire strategy can never be locked into a single course of action – as a company’s goals evolve, so too must the supply chain finance model.
(The author is the founder and CEO of CashFlo)