How to Speed Up Free Cash Flow in a Sluggish Economy

By Bob Stark
Global Head of Market Strategy

Organizations large and small have been impacted by the COVID-19 pandemic, the shaky recovery and major disruptions to the supply chain. For many industries, this deceleration in growth has investors concerned about the immediate future. With weak to moderate growth and supply shortages around the globe, investors know they can expect a lower rate of return. What do companies do to maintain stable growth and mitigate potential investor aggravation?

Where there is a question of free cash flow (or the absence of cash), there will be a CFO and treasury group developing a way to optimize working capital. Savvy finance leaders are looking to manage these fluctuations with supply chain finance (SCF) programs, and are seeking the right information to set up and implement SCF to help stabilize their operations.

As noted in this blog, one of three pitfalls to a successful supply chain finance initiative is the misalignment of corporate goals and individual incentives. The key challenge here is getting the right people at the table to align goals and teams. Without that cross-departmental commitment and participation, the potential bottom-line impact from a supply chain finance program will remain an unrealized opportunity.

Additional reading: Making the business case for supply chain finance

So, who are the mandatory participants required to successfully launch a supply chain finance program and what is their role?

Both the CFO and treasurer should be the strategic champions of a SCF initiative, as they are mandated to nurture and protect the lifeblood of the organization, its cash position: either by reducing excess cash in exchange of greater yield; or creating free cash flow by extending DPO.

It should be obvious that the CEO’s stamp of legitimacy demonstrates the level of priority a SCF initiative has within the organization as a whole. While strategic leadership at the top is a common goal, it’s not one that is easily attainable unless treasury and procurement are working together to build a business case that supports the initiative.

The chief procurement officer (CPO) should play an active part both on internal and external matters. Internally, the CPO should guarantee that the procurement organization’s compensation plan is aligned with the working capital increase objectives and stress the importance of this initiative to his teams. The incentives should be different if the company engages in a dynamic discounting exercise or in an extension of days payable outstanding (DPO). Externally, when possible, the CPO should be involved in the discussions with the most strategic suppliers, and in so doing, set the tone for negotiations through the procurement team.

Another department which will be directly impacted by the implementation of a supply chain finance program is the accounts payable (AP) department. The use of an external platform will have consequences on existing processes – simplifying some, forbidding others and in general forcing a greater rigor on the approval and payment process. The AP team will also need to be tactically involved during the functional and testing workshops to ensure the company ERP system and the SCF payment platform are well integrated. As a consequence, it is crucial for the AP director to be involved early in the process, as the SCF initiative will have a non-negligible impact on its team – namely in terms of time.

Finally, as for any technical activities, the director needs to be consulted to secure the necessary resources and to avoid running into a schedule freeze period that would result in delaying the whole implementation.

It is sometimes difficult to ensure all these leaders are actively involved in a SCF initiative. Here are two reasons why the C-level should feel involved in an SCF initiative:

  • A successful SCF methodology should imply activities around three main axes: program design, technical integration and communication to suppliers. It is then clearly a cross-functional project that requires the active involvement of the treasury, procurement, AP and technical teams.
  • The working capital gain shown through the vendor spend analysis is compelling, and significant enough to warrant CFO and CEO interest.

For these reasons, it is fundamental to clearly define the approach, clarify objectives and go through a detailed analysis very early in the process in order to gain buy-in from senior leadership.

Additional resource: Our Unlocking Free Cash Flow with Supply Chain Finance webinar.