A lifeline for business: Supply Chain Finance in the spotlight

Supply chain finance can improve cash flow, boost financial metrics, and give businesses and their suppliers the flexibility and agility they need to face the unexpected.

In business, timing is everything. Even relatively brief delays in payments coming in from buyers and going out to suppliers can have a huge knock-on effect for any organization.

For large multinational companies with relationships across the globe, blockages in the flow of cash can result in costs that accrue exponentially, adding up to huge sums over time. For small and medium-sized enterprises (SMEs), which can often find themselves stuck in the limbo of waiting for invoices to be settled while at the same time being obliged to cover outgoing payments, interruptions to cash flow can present an existential threat.

Not having immediate access to funds in such situations can, at best, result in operational inefficiencies and, at worst, present real risks to a business’ financial health and survival.

Cash flow is the lifeblood of a business – and managing cash flow is fundamental to the treasurer’s role. The responsibility for ensuring that a company’s capital is being handled in as efficient and effective a manner as possible rests squarely on a treasurer’s shoulders, so finding ways to allow cash to flow smoothly and quickly across the supply chain should be a priority. As the role of the treasurer evolves and expands, it has become ever more critical to keep pace with market risks, industry volatility and the complexities of the global supply chain ecosystem. Creating an agile, responsive and innovative approach to cash flow and working capital is central to this.

Supply chain finance (SCF) offers a solution, as it provides a robust way of bridging the gap between incoming and outgoing payments. SCF is, in essence, a means of optimizing working capital and reducing supply chain risk.

SCF is a set of technology-enabled solutions that connects buyers, sellers and financial institutions onto one platform. This optimizes working capital for both buyers and suppliers; it helps buyers accelerate cash flow, and gives suppliers access to lower financing costs as well as providing visibility into outstanding customer invoices and timing of payment.

This has several benefits. For buyers it can improve financial metrics such as days payable outstanding (DPO), as well as freeing up cash that would otherwise be trapped in the financial supply chain – cash that can then be invested back into a business to fuel growth. For suppliers, SCF can mitigate the effect of payment term extensions and help accelerate their own cash flow.

SCF therefore creates a mutually valuable cycle. It enables the buyer to optimize working capital by allowing them more time to pay suppliers. And it allows suppliers to improve operating cash flow by getting paid early.

It is made possible using specialist technology platforms to provide businesses with access to funding from financial institutions. It is important to point out that SCF is not debt; it is an extension of a buyer’s accounts payable which has no impact on a company’s balance sheets when done properly.

For businesses operating on thin margins, the ability to improve cash flow without increasing debt can be invaluable – even multinational giants such as Nike and Volvo have reaped the benefits of SCF in recent years.

Children’s ready meal manufacturer Kiddyum is a UK-based SME which found itself boosted up into the big leagues when it won a contract to sell its products in Sainsbury’s supermarkets. As a small business, one of Kiddyum’s main concerns was around payment terms. While winning the Sainsbury’s contract obviously provided an enormous opportunity for growth, the company did not have the working capital to cover the increased costs of manufacturing, warehousing, distribution and business services that the sudden increase in scale brought about.

Jayne Hynes, Kiddyum’s entrepreneurial founder, was also wary of supermarkets’ notoriously long payment terms, whereby suppliers can often find themselves waiting for 60 or even 90 days for invoices to be settled. Most of Kiddyum’s own suppliers insist on being paid in 30 days – resulting in a problematic cash flow shortfall. Finding an SCF solution was paramount.

Sainsbury’s gave Kiddyum access to its SCF service, which uses finance from Royal Bank of Scotland and a technology platform supplied by global SCF specialist PrimeRevenue. According to Hynes, this provided the company with “an absolute lifeline”.

“Once we were set up it was amazing, we were able to get the money in the account the next day,” she says. “For me as a small business it is absolutely invaluable.

“We produce on a big scale and we produce monthly, which is a chunky outlay for us. If we had to wait 60 days we would need to have more cash sat in the bank because there is a lot of investment in stock.”

The PrimeRevenue platform enables Hynes to draw down on payments as soon as invoices are approved. When this happens a fee is charged, albeit one that is much smaller than would be the case with using a traditional bank loan or private funding house.

“It’s fairly easy to use and very transparent,” says Hynes. “We have a PrimeRevenue account manager who is always available and I find them very easy to deal with, very responsive.”

It is not just SMEs that can benefit from an SCF solution. Global tire manufacturer Michelin has also made use of PrimeRevenue’s platform, which has allowed it to improve relationships with suppliers and build a more efficient approach to working capital.

Working across different geographies, languages and currencies, Michelin and PrimeRevenue were able to create a flexible and responsive supply chain ecosystem that benefited all parties involved, from manufacturing partners to customers. This was recognized when the partnership was awarded ‘Best Customer Implementation of a Supply Chain Financing Solution’ by Global Finance Magazine in 2016.

“We felt that in PrimeRevenue we had a true advocate, a collaborative partner with the right people, the right solutions, and the right leadership to ensure a seamless implementation and outstanding results,” says Bernard Gerardin, finance manager for group purchasing, Michelin Group. “We are now very confident in our ability to optimize our liquidity while at the same time providing considerable value to our supplier base.”

Another SCF success story is the collaboration between global agricultural equipment manufacturer AGCO and PrimeRevenue. Together they won the ‘Best Customer Implementation of a Supply Chain Financing Solution’ award in 2017 as a result of the speed with which they worked to bring their SCF program online, and the measurable impact it had on AGCO’s working capital.

According to Dustin Barney, purchasing manager at AGCO, “Feedback from our suppliers has been very favourable, indicating the program’s tracking to be a real win-win.”

When seeking a SCF platform, it is essential that treasurers consider three key factors: growth, stability and innovation.

Freeing up working capital is perhaps one of the best ways for a company to achieve growth, both by improving access to ready funds and by building stronger, healthier relationships with suppliers. These kinds of relationships, based on mutual trust and good will, can give businesses of all sizes a real competitive edge, not just when it comes to procurement, but at every stage of the supply chain.

Stability comes from finding a solution that can offer scale, reliability and a proven track record. Having been established for more than a decade, PrimeRevenue works with more than 20,000 customers in 70 countries, handling more than $200bn per year in transactions. Recognized as an industry leader, it has won accolades from industry journals and customers alike.

According to PrimeRevenue CEO PJ Bain, the platform “gives smaller companies access to capital at a lower cost that allows them to innovate, expand or pay down debt. It creates an ecosystem which drives success for all the participants.”

As a cloud-based service, PrimeRevenue does not require its users to install additional software on their existing IT systems. As well as added convenience and flexibility, this innovative approach to technology confers real benefits in terms of speed; payments can be made virtually instantaneously by logging into a secure website, which also allows users to keep track of payments and the status of their account.

Understanding the benefits and opportunities presented by SCF should be top of the agenda for anyone working in treasury and cash management. To find out more about how it could help your business, contact us today.