Published: October 01, 2008
Traditional bank lending is increasingly hard to come by and the utilization of existing cash that is trapped in the supply chain is at a premium. With customary sources of liquidity and finance not being widely available, finding and accessing cash is more critical than ever. Cash is king and in support of this reality corporate treasurers are focusing on the company’s cash conversion cycle - how to convert assets to cash and maximize cash on a global basis. Taking a holistic approach to the physical and financial flows involved in the supply chain can lead to a range of benefits for buyers, suppliers and banks by uncovering the opportunities embedded in their relationship.
From a cash management perspective, it is important to look at corporations and how their customers pay them. Treasurers are focusing on accessing money that is outstanding from customers. The goal is to convert their invoices to cash more quickly. Some tactics for accelerated cash in the collection cycle are electronic payment enablement, quicker conversion of check to cash, direct debit, lockbox and merchant acquiring. Treasurers are also financing their receivables and seeking cost effective ways to keep their money longer on the payables side. Treasurers can address these issues in a manner that allows them to leverage their commercial relationships in a mutually beneficial way.
When correctly structured and implemented, supply chain financing solutions should provide a 'win-win' solution for all three parties-buyers, suppliers and banks.
An increasing percentage of today’s trade is taking place on an open account basis. That being said, the documentary management and export trade services business is critical for global exporters. By working with a bank partner, cash flow can be improved by reducing days sales outstanding (DSO). Deutsche Bank and other financial institutions offer on a global basis export trade financing solutions that support the conversion of assets into cash. These solutions can have a significant impact on the corporate’s balance sheet.
The benefits are tangible. Before a buyer pays an exporter, it needs to be validated that all documents are in order and that the company received what it purchased. There is a lot of money sitting on the balance sheet prior to receiving payment. To accelerate cash conversion, clients approach a bank partner with export letter of credit (l/c) capabilities who can mitigate buyer risk and potentially finance those receivables.
Buyers prefer to pay as late as they can and reduce cost in their procure-to-pay cycle. They want improved days payable outstanding (DPO) cost-effectiveness and efficiency. A bank provider can help create these improvements by matching purchase orders against invoices (invoice receipt management). Payment would then be executed via check, ACH payment, foreign currency payment through an FX payments product like Deutsche Bank’s FX4Cash. The bank provider needs to have the ability to efficiently make payments in any market and via any medium.
There are fundamental conflicts in the supply chain. The supplier wants to convert his inventory to cash as early as possible while the buyer wants to optimize that cash by stretching the payment terms. The way to alleviate that conflict is by effectively offering solutions that align to both of their goals. For example, Deutsche Bank offers a comprehensive array of collections capabilities in export trade receivables and can sometimes discount those receivables when working on a larger scale.
When correctly structured and implemented, supply chain financing solutions should provide a ‘win-win’ solution for all three parties - buyers, suppliers and banks. There are benefits of having a banking partner with local and global knowledge of cash and trade. It is also important to retain an advisor that can ensure compliance and regulatory adherence as well as the operational infrastructure and product capability that is going to have financial impact. Lastly, it is necessary that the bank is able to mobilize its balance sheet and be prepared to manage risk.
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