Emerging factors that at first sight look like fresh sources of risk may provide treasurers with scope to strengthen their relationships with suppliers.
FX… counterparties… interest rates... fraud. All are longstanding, traditional risk areas for corporate treasurers. Even cybersecurity has been acknowledged for several years now as a matter over which treasury departments must be particularly vigilant. But risk factors connected to the supply chain are forcing treasurers to pay greater attention to how they interact with the vendors on their companies’ books. Those factors are:
Supplier-based financial risks and sustainability issues
Almost one in five (17%) small firms operating within European supply chains frequently encounter payment terms longer than 60 days, according to research published last September by the UK’s Federation of Small Businesses (FSB). More than a third (37%) of smaller suppliers in the organisation’s membership reported that their payment terms had increased over the preceding two years. In some cases, payment-term extensions can be mitigated by supply chain finance (SCF) programmes. But often, these arrangements simply enable suppliers to play catch-up, rather than get ahead of the game, and primarily work for the largest suppliers, those companies least in need of liquidity. In reality, those at risk remain exposed to lengthy payment terms.
This scenario can strain relations between buyers and suppliers. Furthermore, it is crucial for suppliers to have a predictable inflow of payments to invest in innovation, so they can grow and develop their products and services for the benefit of their customers. If suppliers don’t have the scope to upgrade themselves in step with industry trends, then ultimately it is their buyers who will suffer.
Regulatory developments
A few regional and national initiatives have emerged to crack down on late payments. These schemes have put corporates on notice to act more responsibly towards suppliers and empathise with the problems that long-delayed transactions cause them. The EU’s 2011 Late Payment Directive set a continent-wide cap on payment terms at 60 days. UK-based examples include the Prompt Payment Code (PPC) and Groceries Code Adjudicator (GCA). Meanwhile, the Netherlands’ not-for-profit Betaalme.nu – or ‘Pay Me Now’ – venture is looking to unlock $2.5bn of liquidity for Dutch SMEs by encouraging corporates to settle up faster.
However, these valuable initiatives are absent in many countries or industries in Europe: the FSB’s research indicates that compliance with the EU’s Directive is somehow shaky. Additionally, the UK PPC is a purely voluntary arrangement: in a recent report, 74% of subcontractors in the UK construction sector called for the Code to be made compulsory and while the GCA can enforce penalties, it only covers the major food retailers.
Capital erosion through inflation
In the wake of the financial crisis, it became de rigueur for corporates to stockpile spare capital for a rainy day, with the hard-to-read economic picture prompting treasurers to adopt a ‘wait and see’ approach to the assets within their purview. However, inflation is eating away at EMEA corporates’ capital reserves, reducing their purchasing power by as much as €20m per year on every €1bn of hoarded cash.
However...
Perhaps those points are not risks after all. Perhaps they are in fact challenges – or, better still, opportunities. The first point highlights the need for treasurers to have a clear view of the entire supply chain, and to consider its stakeholders in a holistic, sympathetic fashion. The second shows that government initiatives are good starting points that have highlighted the problem and achieved some success. Nonetheless, the issue is substantial enough to warrant a collaborative approach between government and businesses. Shouldn’t corporates set the tone for fair and responsible treatment of suppliers? In that context, treasurers and procurement chiefs could be the Enterprise Social Responsibility champions of tomorrow. And lastly, turning to the third point, treasury is increasingly left to mitigate the hidden – and often forgotten – risk of capital erosion: a task that calls for innovative flair.
Treasurers are on the lookout for those new technologies that can help them capture new opportunity gains. Harnessing innovative solutions, supporting other parts of the organisation, such as helping supply chain to reduce the risk of supply shortages and be the ‘customer of choice’, and contributing to margin improvement will all allow treasury to increasingly take a more strategic role within the company.
As a contingency for managing the opportunity areas identified above, the C2FO working capital marketplace enables firms to pay suppliers’ invoices prior to their due dates, in return for discounts offered by suppliers which increases margin. The C2FO system automatically matches and optimises available cash on the buy side with invoice offers on the supply side, releasing liquidity for the latter party. It is one example of how fintech solutions can disrupt the status quo and address some of treasury’s more specific, recurring pain points. In light of a recent Association of Finance Professionals poll showing that treasurers are slow to adopt fintech offerings from non-traditional sources, it is vital for professionals to learn as much as they can about the evolving technologies at their disposal.
Amid the business world’s increasingly complex web of dependencies – all of which are currently playing out against an unpredictable economic backdrop – it is in the interests of treasurers to be trusted allies of their suppliers. Not only is that spirit good for the profession; it’s good for the integrity of commercial relationships as a whole.
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