Cash & Liquidity Management

Capitalising on Market Uncertainties The upside to the current volatile and uncertain market conditions is that they beget the opportunity to make truly exceptional changes to current practices, policies and procedures. CFOs/treasurers prepared to seize these opportunities will be doing far more than merely preparing for future difficult times, they will be risk-proofing their organisations and fine-tuning them for optimal financial performance.

Capitalising on Market Uncertainties

by Lawrence Webb, Global Head of Trade and Supply Chain, HSBC

The upside to the current volatile and uncertain market conditions is that they beget the opportunity to make truly exceptional changes to current practices, policies and procedures. CFOs/treasurers prepared to seize these opportunities will be doing far more than merely preparing for future difficult times, they will be risk-proofing their organisations and fine-tuning them for optimal financial performance.

The CFO’s Opportunities

Supply Chain Streamlining

The costs and risks in a disparate supply chain become more noticeable when trading conditions are weak. Given the trend towards forging fewer, more strategic supplier relationships, large buyers are increasingly focusing on supporting and developing relationships with core suppliers or those which have the potential to become so. In rationalising their trading partner relationships, supply chain risk and costs are minimised. Fewer suppliers handling larger orders are more likely to be willing or able to pass economies of scale back to the buyer and stability in trading relationships helps suppliers obtain financing - particularly in today’s credit environment.

Supply Chain Collaboration

The collaborative approach between buyers and suppliers offers certainty to both parties. The buyer has more assurance the goods will arrive on time and to specification, while the supplier can take comfort from more favourable contract terms.

One of the most mutually beneficial opportunities for buyers and suppliers lies in supply chain finance.

One of the most mutually beneficial opportunities for buyers and suppliers lies in supply chain finance. A company may be an expert and highly cooperative supplier, but if it lacks sufficient working capital, the buyer is running significant business continuity risks. If the buyer is able to take advantage of its credit rating in partnership with a bank to offer supply chain financing, the situation changes dramatically.

Working Capital Improvement

A further advantage of supply chain financing is that it is often largely neutral with respect to the buyer’s own working capital position. In fact, it can potentially be used to improve it. In return for being able to draw against approved invoices at preferential interest rates, suppliers may be prepared in return to extend the credit period on their invoices, thereby increasing the buyer’s DPO and reducing its working capital funding requirement.

The Information Game

Inevitably, any discussion of working capital improvement sooner or later includes days-payable-outstanding (DPO) and its counterpart - days-sales-outstanding (DSO). A variety of factors feed into the reduction of DSO, but one of the most fundamental is information. Particularly in countries where clearing system limitations result in truncated or lost remittance data, it can be extremely difficult to reduce working capital cycle time.

Engagement of a suitable banking partner in this area can reap dividends. Bank reporting systems capable of transmitting information in, or near, real time can advise on incoming funds potentially before they appear as cleared funds in the recipient’s account. In addition, the bank may also be able to offer a parallel routing service for remittance information, which will facilitate the correct application of remittances to outstanding items. The availability of timely and complete information can easily cut several days from DSO.

Reality, Inventory, Liquidity

For many organisations, inventory represents a major element in their working capital requirement. If the buyer wishes to minimise inventory by requesting just-in-time shipments, a considerable degree of trust on the part of the supplier is required. However, this is unlikely to be an issue if the supplier is already benefiting from a finance programme initiated by the buyer and has access to rapid and accurate information on buyer payments.

Rationalisation and Risk

For supply chains to focus on core banking relationships is just as vital as the rationalisation of the players in a physical supply chain. Just as the buyer needs to know that it can depend on its suppliers for deliveries of goods, and the supplier can depend on its buyers for timely payments, the entire supply chain needs to know it can depend on the core banks for financing and credit. By ensuring that each partner in the supply chain has their financing needs met, risks across the supply chain are reduced.

Conclusions

In today’s volatile global economic arena, the importance of trusted supply chain partners cannot be underestimated. Focusing on core relationships where there is trust and tenure helps assure the overall health of the supply chain. When all parties are equally vested in the success of the relationship, it opens the door to a multi-dimensional collaboration that yields efficiency and truly innovative solutions.

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