Published: January 01, 2000
Gone are the days when treasury and trade were seen as separate. The move away from letters of credit in recent years has combined with a greater focus on counterparty risk and cash flow, leading more corporations to take a comprehensive approach to treasury and trade. Financial institutions and technology vendors are similarly aligning themselves to provide an integrated working capital offering – one that often features a supply chain finance component.
In the past, corporations tended to regard business-to-business invoice processing and accounts payable (AP) payment processing as a wholly separate activity from the more complex, cross-border trade finance side of the business. However, in recent years, the argument for taking an integrated approach to treasury and trade has grown stronger as a number of trends within the market have combined to make the holistic approach more attractive. Consequently, corporations, banks and technology providers are increasingly looking at ways of bringing these areas together.
As open account trade continues to replace the use of letters of credit, in many companies, the gulf between treasury and trade has narrowed or closed completely. Banks have responded by building out their procure-to-pay processing, payments (cards and traditional payments), and financing business, designed for open account trading, complement traditional trade and create a clear convergence.
The aftermath of the global financial crisis has increased corporate focus on strategically managing working capital. Corporations have reassessed their own processes to find ways to free up cash and reduce their funding needs. Real-time visibility has become a must-have for treasurers and CFOs. For this to be achieved, data cannot be locked in different silos at the corporate or at the bank. Businesses are increasingly starting to integrate financial and physical supply chain data in a consolidated view to increase visibility and optimise their cash position.
Many companies have increased cash reserves and are looking for short-term, lower risk means to increase their returns. As a result, the focus on working capital has become increasingly important for C-level executives, pushing cash flow strategy even higher up the corporate agenda.
There are three ways in which companies can improve the cash conversion cycle:
In other words: get paid sooner, pay suppliers later and hold inventory for less time. Companies have been looking at ways to tackle all of these areas in order to free up idle cash or maximise their return on investment of cash reserves.
Meanwhile, the issue of vendor health has been brought into sharper focus. With some suppliers struggling to secure consistent, cost-effective access to working capital, companies have increasingly realised that their business model is only as secure as the weakest of their strategic vendors. Consequently, when companies are looking to improve their working capital position, they are increasingly taking into account the health of their key vendors and seeking ways to support their working capital needs.
In light of these trends – the growing focus on optimising cash flow and the health of suppliers – the conditions were right for two initiatives to take a central role in facilitating the convergence of treasury and trade.
One was supply chain finance (SCF) and related invoice discounting. SCF brings working capital optimisation to the next level. Both SCF and invoice discounting – which has its roots in trade finance techniques—can have a major impact on the transactional relationships more traditionally seen as part of treasury.
Invoice discounting and supply chain finance can be buyer or seller driven, and can be bank-funded or buyer-funded. In all cases, they accomplish the same goal of allowing the supplier to finance receivables at favorable terms, providing sustained access to needed working capital. Such programmes can be deployed to offset the impact of increasing the payment terms offered by the buyer, and can provide favorable balance sheet treatment.
Inventory financing can round out the opportunity and includes warehouse and inventory-in-transit financing to optimise just-in-time inventory management and financing.[[[PAGE]]]
The second initiative is electronic invoicing. It is positioned right where treasury and trade intersect. e-invoicing can deliver internal cost benefits and process efficiencies and when used to best advantage, it can strengthen the company’s trading relationships with its counterparties. This strategy is becoming more mainstream, especially among larger corporations. Companies are recognising that e-invoicing can offer cash flow visibility and working capital advantages beyond the obvious benefits of saving processing time and costs.
Linking invoice discounting or SCF with e-invoicing delivers an even more compelling business case for vendors to adopt both.
While e-invoicing is not a prerequisite for a supply chain finance programme, the two initiatives are complementary. Combining them drives efficiency and value to parties on both sides of the transaction, and optimises cash flow visibility and working capital management.
So far, so good – but what does the convergence of treasury and trade look like in practical terms? Where financial institutions are concerned, the first step is to provide working capital experts who are able to speak to the corporation about maximising the cash conversion cycle for local and global transactions, whether that involves extending days payables outstanding and/or reducing days sales outstanding, and whether the solution is based on letter of credit or open account payment terms.
The second component is making sure that the solutions are developed in an integrated way but offered as modules based on a corporation’s needs.
Bringing together treasury and trade includes both products and channels – delivering a unified treasury and trade view as part of the same ecosystem. Practically speaking, a solution must provide visibility to buyers and suppliers from purchase order or letter of credit inception through final settlement for processing and financing.
For corporations, adopting a combined treasury and trade solution is not without its challenges. More than ever before, treasurers have the opportunity to make a significant impact to the company’s bottom line. As the definition of a payment event moves beyond the confines of the actual payment to a broader, purchase order-to-pay scope, the treasurer is taking on a broader role in managing this area. Where working capital solutions are concerned, the impact of the solution goes beyond treasury and accounts payable to a number of areas such as technology, e-commerce, and procurement, creating a complex internal set of stakeholders.
When looking to effectively position such a project internally, the treasurer will be competing for organisation focus and investment dollars. Understanding how a successfully deployed e-invoicing and financing solution aligns with corporate strategy, and how it achieves working capital goals, and benefits each of the stakeholders, is critical to gaining widespread, senior-level support to get the project off the ground.
The increasingly global supply chain, movement to open account trading, and focus on working capital optimisation continue to drive the importance of the treasury and trade conversation.
The business case for change is compelling, and treasury and trade convergence is happening now. Examples of companies approaching the efficient frontier in working capital are becoming more commonplace. Deploying e-invoicing and financing solutions as a means to achieve working capital goals will be a requirement to achieve a global competitive advantage.
This article first appeared on www.gtnews.com in March, 2012
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