Billions of dollars and millions of people-hours are dedicated each year to improving supply chains. From process improvements in manufacturing and just-in-time supply, to technology infrastructure for managing goods in transit and assessing supply and supplier risk, companies are investing like never before in their supply chains. And for good reason! A healthy physical supply chain is the beating heart of every company that produces goods to sell.
But if the physical supply chain is the beating heart of a healthy company, the financial supply chain is its lifeblood. For every movement of goods in the physical supply chain, there is a corresponding transactional cash flow (often referred to as the procure-to-pay or source-to-settle process) that impacts the working capital and financial health of all participants. And many leading companies are now approaching the financial supply chain with the same rigor as they are applying to the physical.
In fact, in a new report, “The CFO’s Guide to Streamlining the Financial Supply Chain,” published by CFO, an Argyle company, one executive stated that “the CFO and supply chain leadership are both shifting from a backward-looking view to a forward-looking view” of the financial supply chain. This is in order to gain the visibility and capability needed to transform payables from a balance-sheet liability into a strategic asset. They are doing so by addressing the inherent challenges of the P2P process, enabling them to leverage their payables to reduce supply chain liquidity risk, free up working capital and deliver value through collaboration with their suppliers
Addressing current challenges
Too often, the financial supply chain is made up of a disparate collection of systems and processes, which makes it difficult to have complete visibility into payable performance and opportunities to improve cash flow. The first step, therefore, in improving a financial supply chain is often implementing systems and processes built upon a common platform and business network to create efficiencies and enable end-to-end visibility into the entire source to settle process. With such a platform in place, the right information can now be made available to the right parties at the right time to enable them to make right decisions and so drive the right business results.
Reducing liquidity risks and driving value
The right results in a financial supply chain often include reducing liquidity risk in the supply chain while at the same time delivering significant free cash flow and earnings on cash to the paying organization. More and more companies are pushing out their payment terms in order to improve their working capital and free up cash. Unfortunately, their suppliers often find themselves cash constrained and unable to access the cash flow they need due to those longer payment terms. The result is an increased level of liquidity risk in the supply chain, which ultimately can affect even the physical chain.
To combat this, many companies are turning to network-based tools like supply chain finance to give their suppliers access to third party funded early payment on approved invoices, while holding on their own cash as long as possible. The result is an increase their own free cash flow while at the same time reducing liquidity risk in their supply chain. Others are using their own cash to fund supplier cash flow in exchange for discounts that yield far more than similar cash investment vehicles in today’s low interest rate environment.
Improving the financial supply chain turns payables from liabilities into strategic assets
In a prime example cited in “The CFO’s Guide to Streamlining the Financial Supply Chain,” a Fortune 100 pharmaceutical company was seeking to optimize its working capital without disrupting supply chain cash flow. A combination of payment term extensions and dynamic discount programs were used to achieve that objective. The result was over $300 million in free cash flow and a contribution of more than $10 million to the income statement. The company moved $5 billion in spend from net-45-days to net-60-days payment terms across 38,000 suppliers in 40 countries. And early-payment discounts increased by 12% over the previous year, delivering more than $6.5 million in savings from the discounts.
According to business school textbooks, payables are by definition a balance sheet liability. However, by focusing on improving financial supply chain processes, forward-thinking companies, like the one cited above, can transform their payables into strategic assets that deliver significant value to their bottom lines.
To learn more about this, please join us for a live panel discussion on Tuesday, Oct. 24. Finance executives from a cross-section of industries will discuss “How Finance Leaders Are Looking to the Financial Supply Chain to Optimize Working Capital and Liquidity.” Don’t miss this opportunity to hear firsthand from top-performing financial professionals and ask them your questions. Register now!