Optimizing Working Capital with SCF and Dynamic Discounting

With supply chain disruptions threatening to torpedo the global economic recovery, companies would be wise to take a closer look at solutions that can help optimize working capital.

Historically low interest rates and ongoing trade disputes have done nothing to reduce volatility in the market or offer clarity for buyers and their suppliers about their sources of capital. At the same time, banks that do have capital to lend are increasingly constrained by stringent regulations that can make it difficult to access funding.

Against this backdrop, working capital solutions can address these challenges for both buyers and suppliers. As well as insulating buyers from market volatility, working capital solutions – like supply chain finance and dynamic discounting – can also help suppliers access the lower-cost funding they need to ensure the health of their businesses.

• Supply chain finance – in which suppliers receive early payments at a favorable rate of funding based on their buyer’s credit rating – can be particularly attractive to industries like manufacturing, automobile and retail, which tend to have long and complex supply chains that span multiple markets.
• Another valuable working capital solution is dynamic discounting, whereby the buyer offers suppliers early payment at varying discount rates. This means buyers effectively put their own surplus cash to work for an attractive rate of return, while simultaneously reducing the cost of goods sold by securing higher discounts.

Obtaining Budget and Sponsorship for a Working Capital Solution

Working capital is a cross-functional area spanning both treasury, finance and procurement. As such, a successful optimization project will typically require sponsorship from senior leadership or a top-down mandate. It will also need to be supported by clear incentives and appropriate performance metrics.

While senior sponsorship is essential to the success of a working capital project, that doesn’t mean a project can’t be initiated by treasury/finance or procurement. On the contrary, either function can present a solid business case to senior leadership in order to illustrate the benefits, gain a mandate for a supply chain finance or dynamic discounting program, and secure the necessary budget. By taking the initiative in this way, treasury, finance or procurement staff may also have the opportunity to present themselves as strategic value officers.

Harnessing Working Capital Solutions

Here are four ways that working capital solutions could help your business:

1. Free up working capital
   Companies often adopt a supply chain finance in conjunction with an initiative to extend supplier payment terms – meaning that buyers can improve their own working capital by extending their days payable outstanding (DPO). By increasing free cash flow, companies may be able to reduce debt, invest in growth or boost dividends.
2. Put cash to work and capture more discounts
   Cash-rich companies face something of a challenge when it comes to achieving a return on surplus cash while still maintaining the desired level of liquidity. Dynamic discounting gives companies the opportunity to invest that cash into their own supply chains without incurring any additional risk, thereby improve their returns. All this is complemented by more discounts, further reducing the cost of goods sold.
3. Strengthen your supply chain
   Suppliers need capital for their daily operations – but in many cases, suppliers do not receive payment for goods and services until months after submitting an invoice. This can place considerable pressure on suppliers’ ability to meet orders, invest in R&D and grow their businesses. Both supply chain finance and dynamic discounting programs give suppliers the opportunity to get paid sooner at a favorable rate of funding, thereby improving their own working capital position and enabling them to invest in their own businesses.
4. Support sustainability goals
   Last but not least, some companies use working capital solutions to support their sustainability goals. This might involve offering supply chain finance in order to empower suppliers to achieve sustainability or even to incentivize particular supplier behavior.

To learn more about the individual benefits of supply chain finance and dynamic discounting and for more information on how to build a business case that you can present to upper management, read our eBook “Making the Business Case for Supply Chain Finance & Dynamic Discounting.”

Download the eBook