Cash & continuity of supply learnings from the tech industry

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By Jordan Novak, Managing Director, C2FO with Antoine Trépant, Managing Director, C2FO 

The technology industry faces challenges including supply chain risk, narrow margins, and cash imbalance that are of a magnitude that few other verticals experience. However, the solutions they use to address these challenges can be utilized by companies in many different industries.

Over the past 20 years, no industry has created more companies with negative cash conversion cycles than technology. These firms’ ability to collect revenue well before they pay for what goes into building their products allows them to invest in research, development, and continual innovation. As a result, cash conversion is one of the areas many tech companies are investing in today.

Most leading technology companies have long benefited from lengthy payment terms with their suppliers that are standard in the tech supply chain, and many are now using C2FO to discover the value that has been lying dormant for years.

By joining the C2FO network, companies can optimize their capital structures – investing cash when available to produce risk-free margin and producing cash when needed to continually invest in their businesses. While this allows for the creation of yield on a completely risk-free basis, it also provides the global supply chain a way to improve financial strength and maintain a healthy continuity of supply. This strategy is becoming commonplace in each of the hardware, software, and services categories, which can all use C2FO to improve P&L and balance sheet metrics based on their dynamically changing priorities.

Treasury and procurement executives are coming to appreciate the value of C2FO for different reasons. With many treasurers feeling pressure to enhance margins, deliver free cash flow, and utilize that capital efficiently, they can now influence each of these metrics directly and flexibly. They can also address the growing imbalance of offshore and onshore cash, each of which can be optimized in these programs.

Procurement leaders can also see the benefits of joining this network. Tech supply chains are some of the most concentrated in the world, with many components provided by a few suppliers. Having a mechanism to support financial health and increase transparency and collaboration with these key suppliers is becoming an invaluable tool for these businesses. Here are key learnings from the tech industry:

Improve supply chain risk management
Tech companies operate in a highly competitive environment with some of the most complex supply chains in the world. With that complexity comes a requirement to be nimble, diligent, and efficient in order to survive. Just as with the products these companies release, one-size-fits-all approaches are rarely successful in this environment.

Developing the latest products requires investments in specialty tooling and other non-recurring expenses. This means that both buyers and suppliers have a lot invested, financially and otherwise, in the success of their partnership. As part of the C2FO network, companies can collaborate not only on these projects but also to find the most efficient way to fund them.

The Deloitte Global CPO Survey 2016 found that the number of procurement executives in the technology industry focused on collaborating with suppliers increased from ten percent to fifty percent over the past year. Offering C2FO to suppliers as an easy way to improve financial health is one way that CPOs are enhancing this collaboration.

Another pronounced challenge for tech companies is their reliance on sub-tier suppliers that are less capitalized than their tier 1 counterparts. While these suppliers do not do business directly with their end customer, their products and services are essential to delivering the end product. C2FO is the first and only technology aimed at addressing this multi-tier funding gap, allowing suppliers throughout the tech supply chain to collaborate and find the most efficient capital for their businesses.

Providing margin improvement
The tech sector relies on continual innovation, which is needed as products are commoditized and made obsolete. This cycle creates incredible cost pressures at an industry level; other than through economies of scale, it is very difficult for firms to ensure most favored costing from suppliers.

One traditionally untapped source of cost reductions has been hidden in the tech supply chain for years. The cost of financing lengthy collections cycles, which can represent over 1% of component cost, can be voluntarily eliminated with C2FO. This incremental margin enhancement leads to exponential equity gains, as tech firms are almost always valued at significant multiples of EBITDA – the measure directly increased by C2FO.

Turn imbalance of cash into a more controlled portfolio
Tech companies were some of the first multinational organizations to embrace globalization from their inception. They procure components and fulfill orders from hundreds of countries around the globe. This complex fulfillment chain creates scattered pools of cash. When liquidity is unequally dispersed throughout the world, a company loses cash control.

One of the reasons C2FO was developed was to help companies take advantage of this imbalance of cash. With one simple connection, companies can generate capital in multiple currencies and jurisdictions where they require it and leverage the cash they have in other geographies to generate margin. This is particularly relevant today as companies face increased scrutiny over the location of cash. Offshore capital is seen as a negative, while offshore margin is considered positive. C2FO helps realign this conversation for its tech clients for the benefit of the corporation and the supply chain.

Putting tech industry learnings to work
While the value that C2FO provides to the tech industry is wide-reaching, companies in nearly every industry vertical use the technology to enhance their businesses every day. The business network is growing with leading companies in the retail, industrial, manufacturing, energy, healthcare, telecom and transportation sectors.

The key is to review your company’s strategic finance and procurement initiatives with an eye for innovation. C2FO can provide a turnkey solution to improve your continuity of supply, margins, cash imbalance, and supply chain health while you focus on your day job.