Innovation has quickly begun to infiltrate virtually every aspect of society, in the process disrupting industries that span across almost every sector.
Entire companies are finding themselves in the midst of being forced to adapting to the vast and far-reaching environmental transformations taking place all around them.
It is in instances like these that many chief financial officers (CFOs) are being faced not so much with the challenge of sourcing for projects to fund, seeing that there are plenty of options including investing in new markets, growing product lines, launching new divisions or acquiring mergers and acquisitions…etc.
Rather, the CFOs’ main concern today is where the money to fund these initiatives is going to come from.
Various external sources of funding are readily available, yet many of the more obvious methods have their pros and cons and may sometimes make implementation difficult.
Debt and equity, for example, are easily accessible to many large companies. The problem is that they can be rather expensive due to the time-consuming methods involved in raising capital as well as being heavily dependent on investor sentiment.
Alternatively, funding sources like reducing capital investment, reduction in force or selling assets could all lead to the freeing up of significant amounts of capital.
The problem is that many of these companies would only choose these options as a last resort simply because they require major organisational changes and can create major internal disruptions.
Our world is getting smaller, with global supply chains stretching across the globe that place multinational buyers on one side and a diverse group of suppliers in numerous countries on the other.
Opportunities for expansion are ripe for the picking and corporations are under pressure to unleash the working capital trapped in their chains but with a limited amount of funding options. Chances are high that all of this hidden capital will remain inaccessible in the long run.
What is a chief financial officer to do?
Is there hope on the horizon?
Fortunately, there is a solution to this malady of modern financing.
Supply chain finance is quickly gaining ground among CFOs in desperate need of a more convenient and flexible source of funding. Also known as supplier finance or reverse factoring, supply chain finance essentially consists of a set of solutions that are designed to optimise cash flow by allowing businesses to prolong their payment terms to suppliers while providing the option for their large and SME suppliers to get paid early.
What this means, is that both buyers and suppliers are able to enjoy a win-win scenario where buyers are able to optimise working capital and suppliers are able to generate additional operating cash flow, thus minimising risk across the supply chain.
How it works
So how does supply chain finance access cash trapped within the supply chain?
By using three primary strategic levers, a CFO can reap the rewards of a well-placed approach.
These levers include increasing payables, decreasing receivables and decreasing inventory.
An assortment of strategies can be incorporated to pull these levers. These include factoring, reverse factoring, term negotiations, dynamic discounting, p-cards and letters of credit.
Companies that stand to benefit greatly from supplier finance include those from the automotive, electronics, manufacturing and retail sectors among many others.
The concept is able to reward both parties without compromising the needs of either one, whichever side of the supply chain these companies are on. Buying organisations can enjoy an increased capacity to extend their payment terms while suppliers are able to get paid earlier.
Supply chain finance then is a mutually beneficial solution and in today’s climate of innovative developments brought about through technological advancement, it seems that supply chain finance is just getting warmed up.
Technology has Made SCF Easier
Supply chain finance may have been around for years, but now, the time is ripe.
With the implementation of advanced technological capabilities, a new spin has been put on how businesses are able to tackle finance issues. The rise of cloud-based SCF platforms has impacted SCF programs in three ways that are poised to revolutionise the ways in which we seek funding, making them more effective, more efficient and easier to initiate.
A by-product of innovation, the benefits of SCF have been made accessible to a range of companies that is wider than ever before.
Technology plays a part in enabling transparency between the companies that utilise supply chain finance and the suppliers that participate.
All parties involved are now part of a network that has instant access to the same threads of information including visibility of payment terms and a more precise indication of when cash is coming.
This, in turn, can help regulate any possibilities of misunderstanding, thus strengthening relationships between buyers and suppliers.
Giving companies the ability to extend their requirements across the board and involve all suppliers instead of just the ones at the top can lead to the benefits of supply chain finance reaching all suppliers of a company’s supply chain.
This can offer more liquidity across the supply chain.
One of the primary benefits that technology spurs in a society is the prospect of simplifying processes that would otherwise be tedious.
Launching supply chain finance initiatives is now easier than ever before, with providers now being able to offer more value to companies through cloud-based platforms by providing a marketplace that can handle multiple requirements from participants.
These include sourcing for financing, supplier onboarding tools to engage suppliers and in-depth analytics that can provide insight on how to optimise processes and systems of record within supply chains.