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Choosing the Right Supply Chain Finance Program

By Enrique Calderon
Treasury & Cash Management Consultant

With ongoing supply chain disruptions happening around the world, Supply Chain Finance (SCF) programs are becoming more attractive to corporate treasury and finance functions short on working capital. But how do you know if an SCF solution is right for your organization? And even if it is, what type of program should you choose?

Defining the Need

Before deciding on the type of SCF solution, you’ll first want to assess whether you truly need one. During my experience working as an assistant treasurer for with a major project-based corporation, we determined a need for SCF after doing benchmark analysis using quarterly, published financial data.

The benchmark review analyzed competitors, vendors and large, state-of-the-art companies, and then compared their results against where we were. We primarily focused on the three balance sheet areas of the cash conversion cycle—inventory, accounts receivable and accounts payable. In our analysis, we – found an opportunity with AP; we were regularly paying faster than benchmarked companies.

Ultimately, we realized that we could reap substantial cash flow benefits by paying a few days later. As a consequence, we would retain cash for longer periods of time, invest it for longer tenors and earn increased interest income.

So again, before choosing an SCF solution, you need to understand what is truly required. And that means better understanding your company, its performance and its needs.

One should also recognize that financial analysts observe when a company’s results are not at an optimal level. Days Payable Outstanding (DPO) is such a metric, because optimization of cash utilization is always a desired result for well-managed corporations.

Bank vs. Bank Agnostic Solutions

When engaging in the research for choosing an SCF solution, it is important to look at your banking partners to see what they have to offer. In our case, we looked at some of our banking partners—including a few of the largest banks in the world.

There are many exceptional solutions that banks have to offer. However, if you choose to go with a bank program, you might essentially be married to its systems and protocols. And that makes it difficult to change applications providers if there is any dissatisfaction with the system in the future; there may also be other constraints regarding funding, where the bank might restrict the funding providers to financial organizations that it favors.

In my opinion, it is much easier to use a bank agnostic SCF solution, like Kyriba, which is what we eventually did. Such a solution provides the underlying infrastructure and minimizes the limitations of a bank-funded program. If you’re using a supply chain finance program capped at $25 million and you need more funding than that to grow the program, you can increase it or add more funding programs as you see fit. You can even syndicate funding availability (participations) with other banks that already actively work with your original funding institution.

So, in our case, we found Kyriba’s model to give us more freedom and flexibility. Kyriba has a vast network of banks and has secure FTP connections to all of them.

What’s more, once we put the program in place, a number of financial institutions actually came to us and said they’d like to participate. So, our SCF portfolio could very easily grow to whatever size we needed.

Kyriba also offers integration into the Kyriba Payment module. With the module, SCF-related payments to the funding bank are completed with ease.

Further, the changes required within the ERP, in order to accommodate the new SCF payment method, only need to be made once—for Kyriba, and not specific to each bank, which means simplicity during the technical AP modifications required to implement the SCF program.

Lessons Learned

Lastly, here are four key lessons from my experience in implementing an SCF program for you to keep in mind, as you explore building the business case for an SCF solution.

  1. Understand the value proposition. As I explained earlier, we completed disciplined analysis to show the internal decision-makers that we were paying faster than benchmarked companies. It took some convincing, but ultimately corporate officers came to recognize that we were missing out on financial benefits by failing to maximize our utilization of cash on hand.
  2. Get your champions aligned. In our case, we had the support of the officers directly related to the effort, the CFO, the Chief Procurement Officer and the Treasurer. And they were engaged from the beginning, motivated to help us communicate to the rest of the organization the importance of optimal cash management. With their support, it was a lot easier to get other colleagues on board.
  3. Keep your people in the loop. Once you figure out who your stakeholders are and you gain your support, you need to have weekly or periodic discussions with the team. You don’t necessarily need to have every issue worked out. You just need to keep everyone informed of the challenges experienced and the progress being made. And it is not just finance and procurement; engage other decision-makers. In our case, a group of colleagues from different disciplines, like controllers and IT, had skin in the game from the start and that helped us get the project underway. Sales and their legal support need to be engaged early and kept informed.
  4. Cover all the bases before implementation. Several standard contractual terms need to be worked out and modified in advance of implementing the program, to smoothly turn a vendor into an SCF-type of vendor at any point in the project execution cycle. It’s also important to ensure that the AP system (with its key internal controls) remains exactly as it existed before the SCF program is implemented. That eliminates any rethinking of internal controls which are well understood by all within the organization (sales, finance, legal, IT, and other support groups).

It’s like they say, God is in the details. If you don’t understand the details of exactly how to put an SCF program in place, you won’t be able to build a business case for it or you won’t pick the right solution.