As treasurers and senior financiers from some of Europe’s largest businesses are gathering in Amsterdam to explore options for developing supply chain finance programmes at the Effective SCF event, it’s time to take another look at the treasury function. Now, if you don’t work in treasury or in a senior finance position, the mere mention of this topic may already be starting to send you off to sleep. But before you doze off or navigate away from the post give me a couple of minutes more of your time to tell you why this is an important point in time, not just for treasury, but for businesses as a whole, and even for the wider economy, of which you and I are part.
What is Supply Chain Finance (SCF)?
Before I do that though it’s worthwhile understanding exactly what is supply chain finance. In layman’s terms, Supply Chain Finance is a method of injecting money into a large buying company’s purchasing process to enable it to either pay its suppliers earlier, on time, or later using a third party bank to provide the funds. Typically, it tends to be a balance sheet exercise for the buying company whereby by using third party funds to pay its suppliers, it can hold on to its cash for longer and show an improved cash and hence balance sheet position. The cost of using these funds from a third party bank is borne by the suppliers who accept earlier payments in return for a discount.
Traditionally, supply chain finance programmes have been run by banks and are very labour intensive. So although a large buying organisation may have tens of thousands of suppliers, SCF programmes typically only target the top 50 or 100. The net result of this is that cash is not flowing as freely as it should between buyers and all their suppliers.
A changing world
However, all this is about to change. Like many areas in life, the adoption of technology is turning traditional Supply Chain Finance programmes upside down. Whereas in the past it was only possible to offer SCF programmes to between 50 and 100 top suppliers, the adoption of technologies like eInvoicing, supplier portals and supplier financing makes it possible for SCF programmes to be offered to all suppliers, because existing relationships and technologies can be leveraged and little or no human intervention is required.
This is a fundamental change for two reasons:
All suppliers can now have the opportunity to get paid early, from the largest, most strategic suppliers, to the guy who delivers the christmas tree once a year
Using technology to automate the process means that the costs are much lower and hence the rates that can be offered to suppliers are very attractive; much more attractive in fact than going for other types of lending like factoring or bank lending
Why SCF programmes can benefit the wider economy
Why should you and I care about this? Quite simply because 80% of the businesses out there are small or medium sized businesses. And many of these businesses supply Europe’s largest companies. If these large companies introduce programmes that help all suppliers get paid earlier, that means they have faster access to cheaper cash that they can use to grow their business and employ more people. And that means for a better economy for all of us.
A SCF programme that addresses the whole supply chain is truly a corporate social responsibility initiative for a large buying business; an initiative that achieves a really significant impact. In the UK’s Department for Business Innovation and Skills report, Building a Responsible Payment Culture, they state, “Payment goes right to the heart of corporate responsibility, where companies should be mindful of their impact on suppliers and the additional costs this can bring.”
A call to treasurers
So here’s the call to treasurers. When you start assessing SCF programmes, don’t just think about your top 50 or 100 suppliers. Consider how by using technology, you can introduce programmes for your whole supply chain.
And here’s why it’s a ‘no brainer’ as the Americans say. By using technology to help your suppliers get paid sooner in exchange for a reasonable discount, you will have just set up your best investment programme for your excess liquidity. SCF programmes targeting the whole supply chain typically earn double digit returns. So this isn’t just a corporate social responsibility exercise to benefit your suppliers and the wider economy, it’s a hard nosed business decision that enables your company to earn more interest from its excess liquidity than from any other short term investment option – now that’s one to think about isn’t it!