For some, normal means a new strategy altogether: a shift away from holding large amounts of cash on the balance sheet to investing in growth strategies. Identifying the right growth strategy is the hard part.
Trade finance is worth consideration. It offers a return on low-risk investment and protection for your supply chain. But not all trade finance options are equal. And not all are a fit for your company’s unique needs. However, there are a few best practices for trade finance that are universal.
“Financing costs are going to rise in 2017, as the economy recovers and grows more than 1.5 percent,” explains Sean Van Gundy, Managing Director, Working Capital Advisory for fintech company, C2FO. “As a result, companies need to prioritize investments in real growth initiatives in the years ahead.”
Previously, Van Gundy led the implementation of Walmart’s supply chain finance program that served over $4 billion in spend and generated cash flow exceeding $400 million.
Trade finance, says Van Gundy, is an initiative worth considering.
Trade finance helps multinationals put cash to work in each geography rather than remain “trapped.” It also supports your supply chain and helps you respond to increasing fulfillment pressures.
“In the last five-to-ten years, there’s been a lot of supply chain transformation,” says Jordan Novak, Managing Director of C2FO. Before joining C2FO, Novak was based in Singapore as a key finance leader for Dell, Inc.
“Twenty years ago,” Novak continues, “Dell’s just-in-time fulfillment model was the golden standard. Now everything has moved from just-in-time to an on-demand fulfillment model. That move puts a lot of financial strain on ordering systems and procurement infrastructure whether you are a B2B or B2C business. Having finance linked into those conversations is a new requirement for CFOs.”
Many organizations focus strategy on managing operating expenses. However, accounts payable offers the best opportunity for your bottom line. For AP, that value lies in both process improvements and leveraging trade finance.
Regarding savings and efficiencies, automating the AP process reduces bottlenecks from reliance on paper documentation. It also shortens invoice cycle times.
AP automation requires not only investment, but significant process change — for both you and your suppliers. A common misconception is that your AP process should be automated before you consider trade finance. This approach leaves value on the table.
“As an example, even if your terms are net 30 and it takes you fifteen days to approve an invoice, you’ve still got fifteen days of value to accelerate payment and earn a discount, or you can get a rebate with a p-card program,” explains Van Gundy.
Since 2008, companies have been managing to the cash conversion cycle (CCC) metric through days payable outstanding (DPO). As a result, payment terms across industries and regions have extended significantly. Finance executives are incentivized to improve cash conversion cycle even as it puts pressure on their supply chains.
“Many publicly traded companies target working capital metrics, which can be very short-sighted,” says Kerri Thurston, CFO at C2FO. “I have seen companies fall short of their revenue guidance due to lack of raw materials, which could have been avoided had they been more focused on supplier health and less focused on working capital metrics. At the end of the day, if the company doesn’t make more money each year and grow, then having great metrics doesn’t matter.”
“As finance professionals, we need to push ourselves to do the right thing for our shareholders and our companies even when we have a misguided target,” adds Van Gundy. “As broader leaders of an organization, how hard would we want to hold people accountable to those metrics if DSO took a dip, but we generated a $5 million worth of income through early payment discounts?”
Trade finance is a broad term. Technically, it covers any time a third party facilitates the transaction in trading goods and services. Historically, trade finance meant a letter of credit,
p-cards or supply chain finance. The third party would have been a bank.
Today, innovation in trade finance is through tech companies, not banks. The change is as much a shift in mindset as it is technology, by viewing a receivable as a form of currency and figuring out how to monetize it. Tech companies offer trade finance alternatives from invoice discounting and invoice sales, to purchase order finance and factoring.
The trade finance option you choose is not a strategy in and of itself. To succeed, you must set your strategy and prioritize your goals for payment terms, supply chain health, and return on investment. Once you have a strategy, then find the right “working capital mix” of trade finance that supports your goals and the full spectrum of your supply chain.
For example, supply chain finance doesn’t provide value for you as a return. The value is in terms standardization or terms extension and support for your largest suppliers.
“The role of a corporate treasurer is getting a little too interesting now,” Novak summarizes.
“As a multinational treasurer, you are now managing totally different companies within your parent company. You might be managing as a net borrower in the US, but also trying to squeeze out every basis point of yield in China or India. You need to work with multiple strategies across the globe daily. In many ways, this forces treasury out of their comfort zone.”
“As a result, tomorrow’s treasurers need to be more of a strategic leader and focus less on the tactical cash operations that once dominated their time. Treasurers must change their skill set to become more CFO-like and more open to new strategies,” he says.