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From Working Capital Products to Financial Supply Chain Solutions

by Frank-Oliver Wolf, Global Head Cash Management & International Business, Commerzbank AG

Companies of all sizes recognise the importance of optimising liquidity to reduce funding costs, improve on investment returns and maximise the cash available for strategic growth. To achieve these aims, many treasurers and finance managers have undertaken a range of tactical initiatives, often in combination with other departments such as procurement, accounts payable and receivable, in order to automate or enhance elements of their order-to-cash or purchase-to-pay processes. While these projects have undoubtedly delivered value in many cases, the next step in optimising liquidity and balance sheet efficiency is to look beyond working capital into financial supply chain management, which has wider implications for corporate processes and relationships and can ultimately lead to competitive advantage.

A holistic view of the financial supply chain

Firstly, it is important to distinguish what we mean by financial supply chain management as distinct from working capital management. Working capital management involves looking at processes within the organisation, such as billing and collections, inventory and payments. Traditionally, treasurers and finance managers seek to optimise working capital by increasing days payable outstanding (DPO) and reducing days sales outstanding (DSO). This could involve extending supplier payment terms, seeking earlier, more predictable customer payments and/or becoming more proactive in chasing overdue invoices to reduce DSO. In addition, many companies have focused on automating payment and collection processes and streamlining bank connectivity.

Making the connections

However, companies do not gain competitive advantage simply by optimising their internal processes. For a company to be competitive, the whole supply chain must be competitive. Looking first at suppliers, the more tightly integrated a company is with its suppliers (and suppliers’ relationships with their own suppliers and so on) the more robust and reliable the supply of goods and services and the more refined the pricing. The company can then offer its customers better quality, reliability and pricing of goods and services, increasing the number and loyalty of customers. This creates a virtuous cycle with a positive effect throughout the entire supply chain. The way that company connects with its customers is also important. Prompt allocation of customer collections maximises credit availability and therefore enables customers to do more business, more quickly. Resolving disputes quickly and chasing outstanding collections only when necessary builds customer satisfaction and again benefits the entire supply chain.

Globalisation and competition

The continued growth of cross-border trade, including south-south trade, is resulting in increasing competition, more complex supply chains and new business dynamics. Companies that will be most successful are those that recognise the interconnectedness of the supply chain and the linked fortunes of each participant. Treasurers and finance managers have an important role to play in this by optimising the financial transactions that link suppliers and customers, which we refer to as the financial supply chain. This includes expanding payment and collection processes to incorporate the customers to which the company supplies goods and services, and the suppliers who enable it to do so.