Although economic conditions may be improving, little has changed in terms of most companies’ keen attention to cash flow and supply chain finance – it’s as critical as ever. By Nick Allen
Economic conditions may be a little rosier than they were just a few months ago, but cash flow and supply chain finance are still critical points of attention for most companies. As businesses gear-up to meet rising demand, greater financial resources are required to oil the wheels of growth and in the majority of cases that means ensuring better cash flow.
However, late payment and long payment terms are still prevalent. According to the Department for Business Innovation & Skills, in a recent discussion paper on the subject, 85 per cent of small businesses say they have experienced late payment in the last two years and SMEs are owed a total of over £30bn in late payments. The paper says payment terms of over 100 days are now far from unusual.
It appears finance schemes devised by large companies to improve cash flow in support of their suppliers during recession may now be being used by some large businesses to extend payment periods – a view put forward by the Forum for Private Business (FPB). The Forum, which represents SMEs, says Mars UK is extending payment times up from 60 to 120 days for some of its suppliers. The supply chain finance scheme allows them to be paid faster, but at a cost.
Interestingly, the FPB has posted a Late Payment Hall of Shame, which includes retailers, Debenhams and Monsoon.
Although the European Union has introduced a directive on late payment – which passed into UK law last year – where companies now have to settle invoices within 60 days or be liable for interest charges of eight per cent, these rights are very rarely exercised. Unsurprisingly, suppliers are worried about damaging future deals.
The government is keen to change this slow payment business culture by encouraging companies to sign up to the voluntary Prompt Payment Code. Many benefits are said to flow from good supplier relationships and a reputation for paying quickly may go a long way to facilitating supply chain collaboration.
Enrico Camerinelli, senior analyst at Aite Group – a research consultancy focused on the financial services sector – believes companies are starting to realise the value in being seen and ranked as good payers. “If you have a good standing in terms of payments, then that means you have good and loyal
suppliers, so the operations are more stable and more reliable,” he says. This may in turn help to improve the credit worthiness of early payers.
In an environment where businesses are still finding it difficult to borrow money, banks and businesses need new ways of thinking.
According to Camerinelli banks should look beyond the traditional means of assessing the credit worthiness of an enterprise. “Mid-sized companies may have very good operational performance which is not necessarily reflected in their financial results. So if, as a bank, you are able to detect and understand this kind of information – being able to look into the physical supply chain of a company – you may be able to integrate those characteristics with the typical financial criteria that bank credit risk managers use.”
He says branch managers once had this visibility, but now there are few branch managers left, so systems are needed that give that visibility – to enable banks to translate operational performance into confidence on financial performance.
Creditworthiness
“A good logistics KPI can reflect good financial stability. Which is very different from the comfort zone of assessing the credit risk used today,” he says.
But it is not just banks that should to take this on board – businesses need to understand this too. “The creditworthiness measured in terms of pure balance sheet and income statement is not sufficient today to really give the full spectrum of the risk of that one company. The smaller companies need to understand that they have to offer more information,” he says.
Camerinelli points out that in the UK in particular there are a number of ‘non-banks’ offering peer-to- peer lending, like Crossflow Payments and Platform Black. “They are more flexible and more able to understand the real risk profile of mid-sized companies,” he says.
But other facilities for borrowing are opening up within the logistics sector. The Logistics Guild Credit Union (LGCU) – an initiative from Skills for Logistics with financial adviser Promethion and other industry partners – promises to offer an ethical and cost efficient source of finance for the industry. As a not- for-profit financial cooperative, members will have access to the smaller loans that gain little interest from high street banks.
However, managing large complex supply chains with hundreds of international suppliers, all working in different languages and time zones, requires slick financial systems. According to Nick Stainthorpe, partner at law firm, Reed Smith, “Supply chain finance on this scale is a major information management project in its own right and it is not necessarily a project which banks are set up to deal with,” he says. “A model using a variety of partner banks and factoring companies is sometimes applied, but this can be rather cumbersome for the head of the supply chain.”
He explains that a number of companies have created multi-lingual platforms that allow suppliers to interface with a simple online process to post their invoices for funding. The invoices are confirmed with the trade debtor and made available with supporting documents for the funding parties to purchase. He says the funders can be banks, asset managers or even securitisation SPVs.
Interestingly, by separating the source of funding from the IT provider, the pool of capital is expanded beyond the traditional trade finance divisions of banks, to also include capital markets players which can deploy funding faster and without the hurdles imposed by Basel lll.
“These technology platforms come in many shapes and sizes,” he says. “Some form part of a purchaser’s e-procurement and supplier management systems, such as Tradeshift. Others offer online peer-to-peer receivables trading platforms such as Aztec Exchange.
“A system such as Aztec Exchange’s provides a gateway that allows a hedge fund manager in Mayfair to extend working capital to a fruit supplier in Uruguay overnight. This is opening up whole new avenues for origination and execution of trade receivables purchase transactions for investors which lack the infrastructure themselves,” he says.
Stainthorpe explains that with a $12 trillion market of unfunded global exports available, technology which is improving all the time and historically low yields in traditional investment products, many alternative investors are eying trade receivables as an area worthy of exploration.
However, it is as vital for small to medium sized companies to keep close tabs on their supply chain finance as the larger corporates – perhaps, even more so.
Jamie Hall, divisional sales leader within the supply chain solutions division of Access Group, notes that SMEs tend to have varying levels of integration when it comes to supply chain and financial systems. “There are three flavours of systems. There are supply chain management systems that will manage all your stock – and maybe your manufacturing systems – that have no financial ledgers at all,” he says. “Then you have those that have a form of financial ledgers but they run on a batch update routine, whereby you do all your operational processing in your supply chain system and then you have to do a batch update of those transactions to enable your financial ledger and your operational and management reporting to be done. And thirdly, you have a single integrated solution.”
Financial implications
He explains, “In an integrated solution a stock movement, of say, a box from warehouse A to warehouse B, will automatically generate the financial implications of that move, meaning that all your management reporting, analysis and operational actions are up to the moment.
“Ultimately, the benefit of having an integrated system is that you have one single view of your data, so whether you have processed something on the financial ledgers, or in the operational areas around the supply chain, you have a single view of that data.”
A system that integrates finance and the supply chain has the ability to react faster, enabling managers to make informed decisions. “We come across a number of operations where they have a WMS that is distributing orders and pushing product out of the door unaware that an account may be on ‘stop’ or it is over its credit limit and this is because there is a disconnect between the finance ledgers and the warehouse system,” he says. “In an integrated solution, as soon as an account gets placed on ‘hold’ it will change the status of an order to ‘hold’, and therefore orders cannot be processed and the company is not exposed to bad debt.”
But it is control of cash flow where the benefits of an integrated system can be seen clearly. “The whole cash flow management piece sits around: What stock do we have where? How long have we had it? If we are overstocked, what are we doing to minimise it? And also what are we doing to forecast cash and how much stock we are holding? Without an integrated link you have no idea what is happening,” says Hall.
“Integration helps with planning. It may be that some products are on a reorder lead-time of a number of weeks, but perhaps those orders fall late, forecast cash flow may then fall short,” he says. “Without an integrated system, finance may not be aware that the cash they are forecasting coming in isn’t going to happen.”
Hall believes that the integration of finance and supply chain systems is now a must have. But he says you need a software vendor that can provide an integrated approach. That way you are managing one relationship with a single vendor.
Legislation
Vince sets out late payment plan
Business Secretary Vince Cable has put forward proposals for greater transparency of company payment practices to help smaller firms get paid on time.
Following a consultation in which a majority of businesses called for more disclosure to tackle late payment, the government will require larger firms to publish information of their payment practices, and will also act to remove legal barriers preventing firms from accessing invoice finance.
The government will also work with the Institute of Credit Management (ICM) to strengthen the Prompt Payment Code and to increase accountability of signatories. Where legislation is required to implement the package, it will be introduced when parliamentary time allows.
Cable said: “The government has taken action to create a responsible payment culture but we need to go further. We will now make it compulsory for large companies to publish information about their payment practices so that those who are not playing fair can be held to account.”
However, the government does not intend to introduce a maximum legal payment period at this time.
Instead it plans to work with
industry bodies and business stakeholders to promote sector- based approaches to the development of advice and codes of best practice.
It will also work with trade bodies and associations to raise awareness of the training opportunities that are available to smaller businesses to inform their staff of how best to access and manage sources of credit information.
And the government said it was keen to address any barriers that make it difficult for smaller businesses to manage their working capital requirements.
Originally appeared in Supply Chain Standard, June 2014
