5 Steps to Setting Up a Supply Chain Finance Program for Your Company
90 billion dollars. That’s how much cash businesses from Australia and New Zealand currently have trapped on balance sheets, according to a recent survey by PWC. That’s a staggering amount, and represents a huge opportunity. So much so, that, if the poorest performing companies in the study were to bring their working capital performance in line with their industry peers, they would have enough cash to more than double their capital investment without access to additional funding, or putting excess pressure on cash flow.
One solution, according to the report, is supply chain finance. Historically, the Australia/New Zealand market lags behind it’s American and European counterparts on technology uptake, specifically in their implementation of cash flow programs, and gives their competitors in these regions the competitive advantage within the global marketplace.
In my experience, many corporate treasurers and CFOs already recognise the wealth of benefits released by implementing these programs, however they struggle with either limited supply chain finance experience, or lack the knowledge to roll out across their organisation and supply chain. There are also professionals working in finance who have some knowledge of invoice finance products, but they have been discredited or lumped in with factoring programs which are not considered so highly.
As a first step, companies looking to undertake an SCF program should start with an assessment of the current challenges facing their supply chain, and a reasonably clear view of how well it fits with their overall business environments. No supply chain financing program can be expected to be successful if it is applied as a hasty fix to a discrete point problem. These programs are very involved, and given that they have touchpoints with many stakeholders, both within the buyer’s organisation and externally across its network of suppliers, it must be approached as a strategic initiative. If implemented well, it can provide sustainable long-term value for both buyer and their suppliers.
Progressive companies are moving away from making terms extensions and SCF programs as just another unilateral mandate from the buyer. Increasingly we are seeing a lot more collaboration between parities and an acknowledgement that suppliers will have their own view of extended payment terms, and of the attractiveness of a supply chain payables financing proposal. Small business financing displays its own set of unique issues and the acceptance of this solution will vary depending on each individual supplier’s circumstances; their ability to access funding and associated costs, their growth agenda, leverage profile and short-term liquidity requirements.
As an example: a stable, longtime, preferred supplier of major subassemblies or components—engine manufacturers supplying truck companies, say, or a producer of touchscreens for smartphones—will have a significantly different perspective to seasonal suppliers or innovative startups with potentially attractive technology offerings. Those business finance differences must be understood by both finance and procurement groups before they embark on such a program.
With so many variables to consider, here is our five-step checklist for setting up a SCF program:
- Establish the business case
- What are the business drivers – working capital release, supplier risk management, margin improvement, return on excess cash?
- What is the company looking to achieve?
- What savings are being targeted, and by when?
- What are the necessary key performance indicators?
- Ensure alignment
- Who will be the program’s sponsor in the C-suite and/or on the board of directors?
- Who will be the executives involved on an ongoing basis from the supply chain/procurement group?
- Have you engaged the right people from finance, legal, IT, Audit?
- Select SCF provider(s)
- Which financing partners are best suited to your supplier network and do they have sufficient credit appetite/liquidity to support scaling the program?
- Consider specialist fintech platforms versus platforms offered by traditional financial services providers around easy to use portals for your suppliers. Can it be integrated into your ERP systems to offer seamless processing?
- Introduce the program to selected suppliers
- How do you segment your suppliers to get the most momentum from an SCF program?
- What messages do you want to send about creating this alternative funding opportunity?
- How best can you convey those messages, so they see this offering as a strong alternative to traditional business loans?
- Expand and regularly refresh the program
- How do you monitor supplier adoption of the program?
- Can you identify and recruit other champions for the program and ensure it can adapt easily to other business changes?
- How does the organisation use the program when adding new suppliers?
The right SCF partner can help you work through all of these considerations and take away some of the challenges during implementation.