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Discovering Treasury’s Role in Supply Chain Finance

By Kyriba

Supply chain finance (SCF) is a way for companies to better manage their working capital and leverage opportunities made available by high interest rates, recent developments in supply chain management, and strong relationships between buyers, suppliers, banks, and other solution providers.

After providing important background information about the opportunities and developments in supply chain finance, a panel session at KyribaLive 2023 reveal treasury’s vital role in unlocking the potential of supply chain finance to improve cash flow and working capital management. Panelists include Lee-Ann Perkins, Assistant Treasurer at Specialized Bicycle Components, Robert Gosma, Assistant Treasurer at Driven Brands Inc., Paul DeCrane, EVP North American Practice Leader, Zanders Advisory, and Edi Poloniato, Global Head Banking Channel and Working Capital Solutions at Kyriba.

Supply Chain Finance Opportunities for Corporates

Supply chain finance, also known as reverse factoring, payables finance, or confirming, is a financial instrument that offers early payment programs to suppliers, providing a win-win for both buyers and suppliers.

While organizations have always had a spectrum of liquidity scenarios for both favorable and non-favorable credit markets, historically they have had to rely on banks for financing. Now, with the broad universe of fintechs and opportunities in the supply chain finance area, organizations can optimize their working capital, and as DeCrane explains, “Pull cash that’s trapped in the revenue cycle out of the revenue cycle and put it to better work for growing your company, saving costs on borrowing as well as enhancing both supplier and customer relationships within the organization.”

One reason why supply chain finance is a big opportunity now is high interest rates. Because interest rates are high, organizations can use arbitrage strategies where the buyer can leverage its credit to extend faster payment terms and a higher flow of cash back to their suppliers. DeCrane stresses the long-term outlook of high interest rates creates a “sustainable opportunity to have your customers on the supply side participate in these programs and then you also see a benefit.”

Identifying Treasury’s Role in Working Capital Management

Due to their expertise in cash and financial risk management, treasurers are increasingly playing a central role in working capital management. Their expertise and broad skillset make them invaluable advisors, and their work in optimizing liquidity and protecting the supply chain contribute to the overall success of the company.

DeCrane remarks the treasurer’s role in working capital is not only in cash and liquidity management, but also as the “air traffic controller.” He explains, “You need somebody who has the knowledge and the understanding to look at the variety of financing options under different scenarios in order to make the right financing decision at the time.” In their role as “air traffic controller,” treasurers need to look at financing options, credit facility agreements, factoring, reverse factoring, supply chain finance, as well as the cost, availability, and time it takes to bring these programs to market.

Treasury’s role also involves being able to coordinate activities with legal, tax, accounting, and procurement. DeCrane emphasizes these activities require a broad skill-set and “it’s really in many cases the treasurer being the head of corporate finance and advising the CFO on what the different options are.”

From Perkins’s perspective, treasury is the “glue in companies.” The nature of business means there are sometimes conflicting opinions between supply chain, treasury, and the CFO. While the supply chain department is extending terms to keep supplier relationships satisfied, treasury has to worry about covenants, liquidity, and cash balances.

Perkins highlights, “It’s very much a fine line between ensuring that what each side of the equation is doing is really what’s best for the company and that any solution you put into place has to be global in nature. It can’t be one-sided. There are a lot of different solutions out there, but at the end of the day you have to choose one that’s really the right choice for the company and can optimize liquidity, which is what we are really doing in treasury.”

Notably, Perkins emphasizes treasury’s role in protecting the supply chain to mitigate supply, demand, and operational risks. Perkins elucidates how important minimizing supply chain risk is for Specialized, as they are the only bicycle company in the world that sells a bicycle with 100% the exact components that are required in the specifications. As such, Specialized’s suppliers are crucial because “without them, we don’t have a business.”

Specialized protects and sustains their supply chain by ensuring that “those strategic suppliers are happy, that we’re protecting the relationship, that we’re stabilizing them, that they remain solvent. They need us. We need them. It’s part of the ecosystem of treasury and it’s a win-win relationship.” Perkins also explains that showing suppliers how supply chain finance solutions benefit them is key to getting them to sign up for programs.

Building Relationships is Key

The panel members emphasize a key part of treasury’s role in supply chain finance is to build and manage relationships with buyers, suppliers, banks, and other SCF solution providers. While factoring is related to market observations, treasurers have more control over supply chain management by cultivating relationships.

When asked about the benefits of using supply chain finance, Gosma declares, “Relationships, relationships, relationships. Cash is king, but relationship is queen. So, building a better relationship with your supply chain is key.”

Gosma explains that those relationships can grow into a long-term arrangement that is beneficial for all parties involved. For example, supply chain finance helps with the cash conversion cycle for both supplier and buyer, and the banks earn income on the discounting they give to suppliers, leading to even better relationships for different needs with the banks and other financial institutions.

An important SCF benefit on the supplier side is cheaper financing, which reduces risk and helps to support the supplier when they have short-term needs. On the vendor side, supply chain finance helps the relationship with procurement because vendors can choose to get paid early.

Like the other panel speakers, Gosma also emphasizes that relationships within the organization–with procurement, accounting, legal, etc.–are critical to making supply chain finance programs work. While treasurers sometimes need to educate the various players about the benefits of supply chain finance, Gosma mentions that “once they see what’s in it for them, it’s a pretty easy program to get past all the hurdles within an organization. Then, they see the benefit later and the plan basically pays for itself.”

To measure supply chain finance success, Gosma suggests leveraging these relationships to solicit feedback from providers by asking them “if they’re happy with what’s going on, if they’re happy with dealing with the vendors, if the returns they expected are coming in as they expected as well.” Internal stakeholders, such as the procurement team, should also be contacted to see if the supply chain improvements are working.

Choosing the Right Supply Chain Finance Solution

The panel discussion continues with a discussion about key factors to consider when selecting a supply chain finance provider.

From a treasurer’s standpoint, Perkins emphasizes, “The most important part is to have a service provider that understands your needs and can help you with the solution that you’re looking for.” Perkins also advises confirming the solution provider can help with the bigger pieces of supply chain finance setup, such as vendor onboarding.

From his perspective of working with a syndicate of banks, Gosma advises sending out an RFP to ensure a fair comparison of potential banking relationships. After receiving the bank’s proposals, he recommends treasury departments meet with banking representatives to hear their pitch, which also helps with relationship building. Gosma comments, “Some of the banks will win. Some will lose. But again, if you’re able to spread that out a little bit and share the wallet, you’ll maintain a good bank group. And that’s something I mentioned earlier, maintaining that relationship, because you may need that relationship for some other event that comes along.”

Another key factor in selecting providers is to make sure the counterparty risk is not a concern on your side. Perkins emphasizes, “Please make sure you use a bank or a service provider that will be stable and will be with you through the entire program. It’s not a quick and easy one. It takes a lot of time to set these things up correctly.”

DeCrane underscores there are options other than banks, including fintechs and other technological solutions, that enable suppliers to sign up for supply chain finance programs. Perkins adds, “There are a number of really good fintech solutions and they are sometimes easier to implement than the banks, but it’s up to you and what your company really needs.”

Optimizing Working Capital with Kyriba Platform

Kyriba’s Poloniato provides a brief overview of how Kyriba can accelerate the cash conversion cycle, including SCF options, by optimizing payables and receivables management.

An important component of Kyriba’s Enterprise Liquidity Management platform, the Kyriba Working Capital Solution includes:

  • Dynamic Discounting (DD): Optimize your excess cash by paying your suppliers early in return for a discount.
  • Supply Chain Finance (SCF): Optimize cash flows by extending payment terms to suppliers, while allowing all suppliers access to an early payment.
  • Hybrid SCF and Dynamic Discounting: Switch between third-party funding and self-funding solutions dependent on your cash position at any given time.
  • Purchase Order Finance: Allow suppliers to be paid before an invoice has been approved.
  • Receivables Finance: Optimize cash flows by getting paid early for unpaid receivables from your customers.

Supply Chain Finance diagram

Unlocking the Potential for Future Growth

With supply chain finance solutions, organizations can reduce financing costs and optimize cash flow to free up capital, allowing for better financial management and investment growth opportunities. SCF solutions can help in the on-going effort to ensure organizations are extracting capital, not over-investing in inventory, and collecting and paying on an effective basis.

With increasing interest rates and technological developments, supply chain finance is a lucrative opportunity for organizations to work better with suppliers and build on relationships over the long term. DeCrane suggests putting working capital programs “in place before you need them” because they will provide “a return in a lower cost of capital to your organization. The economics are solid and any CFO would be very excited to make the investment.”

Watch this on-demand session to learn more about why a treasurer plays an important role in working capital optimization.