Shifts in Corporate Focus
The Kyriba Working Capital team has seen a dramatic increase within the last eighteen months in the number of organizations exploring working capital solutions, or looking to expand on their existing programs and related solutions. When we evaluate payables optimization the main draw for supply chain finance (SCF) programs since the pandemic has seen a mind shift change, whereby corporates are ensuring that their suppliers have the necessary cash flow to focus on the continued delivery of goods and services to maintain the supply chain.
Within the last decade, organizations of all sizes have significantly changed their vision and processes for managing working capital. During my time delivering working capital initiatives at some of the world’s largest multinationals the primary focus was on payment term optimization and standardization. This method of working capital enhancement, enabled with Supply Chain Finance, is a successful tool benefitting both the multinational as well as their supplier’s. With significant macro events dominating the past two years and the prospect of increasing interest rates on the horizon, enterprise organizations have had to innovate their internal operations to survive and the focus on cash has never been more important.
This has seen increased focus from corporates large and small, concentrating on managing cash across the cash conversion cycle by exploring alternatives to payables finance. With enhanced technology solutions, accelerating receivables has grown significantly in the past two years, giving an alternative source of cashflow than revolving credit facilities or overdrafts. Receivable’s finance is an important lever contributing to improved cashflow and improved cash metrics like days sales outstanding (DSO).
Greater Value from Evolving Working Capital Programs
Perception of the benefits that a SCF program provides for suppliers has also recently changed. In the past, suppliers would often decline early payment programs due to the time-consuming process to join. The numerous and burdensome administrative tasks and internal process changes required were deemed to be a low-value-add activity compared to simply receiving an early payment. Significantly improved supplier onboarding practices and lead times driven by enhanced financial technology vendor solutions have removed this barrier with broader buyer access to early payment solutions has increased the opportunities for suppliers.
Furthermore, with the exponential improvement in technology and digitization of organizations, combined with macro-economic events such as the global pandemic, supply chain shortages and inflation, there is a renewed realization that to deliver balance sheet optimization, CFOs need multiple levers across the cash conversion cycle to achieve success.
As organizations continue to trade goods and services, corporate leaders can leverage working capital solutions to close the reported $3.4 trillion trade financing gap. In addition, corporate buyers can embrace the value of working capital programs providing minimal, risk-free liquidity with the option of an early payment solution that can be all encompassing and fully inclusive.
Here’s six factors that should be considered when evaluating an all-encompassing working capital program:
- Automated Workflows & Real-Time Data: Automation and real time data helps to better understanding organizational current cash position, FX exposures, and 90-day forward / backward-looking forecasts for payables and receivables. Real time data enables treasurers to decide on competing objectives at any given point in time with a flick of a switch without managing multiple excel spreadsheets for one version of the truth.
- Don’t Hurt your Suppliers: Business objectives will be ever changing, therefore having a solution that can meet these critical points in the journey of balance sheet vs COGS priorities is ever more important. Cash flow visibility can enhance a simple SCF led solution into a hybrid solution by deploying excess cash via dynamic discounting.
- Procurement Optimization: Having clear data that can clearly define what your suppliers provide, what their capital constraints are, and their credit rating scores helps in the decision-making process. Clearly defined procurement objectives will ensure that procurement leaders can drive increasingly important initiatives in tandem with supporting and delivering on the treasurer’s key objectives.
- Receivable’s finance: Sellers have factored and sold receivables for decades to multiple funders with varying rates and platforms to manage. How about a solution that can consolidate all receivables activity, allow you to trade seamlessly and provide reporting on activities across the organization.
- Off Balance Sheet Inventory Financing: The pandemic and subsequent supply chain delays have made it evident that inventory management must evolve. Just-in-time operations have taken a detrimental hit and the act of holding material inventory will ultimately be the way forward to mitigate any supply chain issues.
- Strategic Knowledge at your Fingertips: Know Your Customer (KYC) standards are a real requirement; not just a financial regulation for financial institutions to adhere to. The more we know about our supply chain the more in touch we are as a business.
With advancements in global trade and disruptions in the global economy due to the pandemic, working capital programs have become increasingly more valuable to organizations of all sizes to find free cash flow and better returns. Strengthening supply chains through better supplier results and relationships deliver overall better financial and operational results.