Brexit, Cash Flow, And The Supply Chain

Pascal d’Arc

Putting aside the impact Brexit has had on politics, culture, pride, and family, a burning question for businesses is: How will Brexit affect cash flow across critical supply chains? And if Brexit will have an impact on these cash flows, how do I mitigate against a shortfall in the lifeblood of my supply chain that directly impacts my ability to operate?

To explain why there is an impact at all, it’s important to look at how the overall supply chain works across Europe. The EU states’ free-trade agreement means goods can flow between the UK and the other European member states without customs and excise checks, thus there is an economic flow of commerce with a physical flow of goods and materials. The financial supply chain and the physical supply chain are therefore linked. For example, if you cannot receive delivery of your raw materials, then you cannot fulfill your customer orders. If you cannot fulfill your orders, then you cannot submit your invoice and, most importantly, you cannot get paid. Therefore, any disruption to the physical supply chain will quickly place greater demands on working capital requirements.

To understand the scale of the potential challenge, we can take the SAP Ariba Network as a benchmark. SAP Ariba’s B2B platform has buyers and suppliers trading between the UK and the rest of Europe, comprising of billions of pounds in commerce. This means the movement of goods, flowing logically (i.e., orders, invoices, and payments) through the network, the issuance of those invoices, and the resulting payment are dependent on goods and raw materials making it across the channel. A delay to this supply chain can not only have a knock-on effect on the efficiency of just-in-time, consumer demand but also on the ability to manage the receivables and payables of an organization’s cash flow.

So how do we manage this situation if it happens? There are options available, with financing a key underlying tool. Several choices are available:

  1. Cash-rich companies can help prop up the cash/liquidity shortfall in their supply chain by offering to pay suppliers early or even on purchase order (PO) issuance. Even partial payment at the pre-delivery stage may mean the difference between a key supplier managing through difficulty or facing real financial solvency issues.
  1. Acquire low-cost lending from banks via PO or invoice financing schemes. Even now, it may make sense to take advantage of buyer supply chain finance (SCF) schemes to build a stockpile of cash to manage through the leaner times ahead of Brexit.
  1. An alternative is the higher cost receivables financing (factoring) programs that a supplier can enter into with a bank.
  1. Use a card as a means of payment; although it’s even more expensive, it is a method of early payment against getting cash payment at the end of the invoice term.
  1. Focus on UK domestic goods for early payments. As there is no disruption between domestic buyers and suppliers, engage with your domestic supply chain to get either early payment agreements or low-cost early payment funding to help shore up the possibility of disrupted cash flows from the European supply chain.

Although all of these have a cost, the stark truth is Brexit (hard, soft, or otherwise) will have some impact on the supply chain and, therefore, create risks and costs to trading partners dependent on UK imports and exports to Europe. The real cost is hard to measure, but SAP Ariba is helping its customers by including options around the above key strategies. Organizations that can get ahead in this respect can secure their supply chains, form stronger partnerships, and outperform competitors by building a different type of partnership based on managed cash-flow risk and working capital needs.

By helping buyers and suppliers get better visibility of the supply chain, a business network can give assurances to buyers on their supplier’s orders, and to suppliers with low-cost funding to fill the shortfall. It also means buyers do not need to make knee-jerk reactions to shift risk onto suppliers without the foresight to see that jeopardizing liquidity in the supply chain actually jeopardizes your business. The old saying goes, “a chain is only as good as its weakest link,” and cash liquidity forms an important part of the strength in that linkage.

To learn more, register today for our Webinar, “Transform Uncertainty in International Trade into Creating Shared Value in Your Supply Chain.”

Pascal d’Arc

About Pascal d’Arc

Pascal is a senior director in SAP Ariba’s Centre of Excellence bringing innovative solutions to help customers find new areas of competitive advantage under the vision of #BusinesswithPurpose.