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By Gopal Iyer, Sourcing & Supply Chain Consultant at4C Associates, an award winning management consultancy specialising in procurement, savings delivery and managed services

Regardless of the size of a business, freeing up capital to grow is often a priority, especially for those businesses with ambitious expansion plans. The solution is often a supply chain finance (SCF) programme to help maximise working capital and kick start growth plans.  Also known as supplier finance or reverse factoring, SCF is a set of solutions to optimise cash flow by allowing businesses to lengthen their payment terms to their suppliers while providing the option for their large and SME suppliers to get paid early.

But, companies should beware of a ‘one size fits all’ SCF solution. The key to getting the right SCF programme is to customise it based on your own individual business objectives, strategy, footprint and sector.

Cash flow and working capital

The last three decades have seen supply chains extending globally more than ever before. Not only has this offered more opportunities to businesses, but also exposes them to a variety of financial risks, including cash flow availability. Constraints on cash flow can limit investment and growth, and in worse cases result in insolvency. Strong cash flow is essential for businesses to raise finance, with 48% of declined finance applications over £25,000 in 2012/13 rejected on ‘affordability’ grounds.

We have seen more than 75% of B2B transactions undertaken on credit terms of some form, while trade credit is more than 30% of total assets. This includes a variety of trading terms.  Traditionally used on a case by case basis and designed for specific suppliers, it was rarely seen as an opportunity to fuel sustainability and improve overall financial robustness of supply chains as a whole.

SCF offers an opportunity to improve working capital in a sustainable way. With reverse factoring as the underlying mechanism, it is buyer-rather than supplier-centric. Our clients and suppliers have seen a double digit reduction in working capital as a result of successful SCF programmes. While SCF can be difficult and time consuming, these steps can be key to implementing it successfully.

  1. Establish the desired outcome and resource accordingly

The absence of a clear strategy for the programme can lead to a failure even before it kicks off. SCF needs to have a clear owner, set of  objectives and a team of people who can influence and measure  change. It is also important to choose the right banking partner to support the SCF programme which will differ based on the desired outcomes: like improving working capital over a long term, or optimising supplier payment terms on a short term. The team should agree on a set of outcomes in the initial phase and determine the activities required.

  1. Improve supplier collaboration and other internal/external stakeholders

Unlike many improvement projects, an SCF programme is a collaborative and outwards looking activity dependent on the level of relationship with your suppliers. There is a need to communicate with suppliers and explain what is in it for them, so they are ready to see the ‘long term’ benefits. This also helps them understand any implementation challenges involved.

Suppliers should be given ‘options’ to choose from, such as multiple options for payment terms at different levels of discount to increase willingness to collaborate. Also, it is important not to expect to make everyone happy and to remain objective and avoid any personal bias towards certain suppliers.

  1. Spend data management

Spend data availability is an issue common to all procurement projects and is even more of a concern for SCF.  With increasing complexity and scale in global organisations, we see a pattern of reducing compliances and multiplicity of data formats. As a result, it can be difficult to form a good picture of spend and services that multiple units might have with the same supplier.

A good way to overcome this challenge is to adopt data management technology and process standardisation across the organisation to help you manage spend data in a usable format covering the supplier, spend and category information.

  1. Streamline your supply chain and have a proper contract database

Too many suppliers can become difficult to manage, with spend per supplier also too thin to make the programme worthwhile, so it is important to rationalise the supplier base, taking into account the long term sustainability of a supplier relationship at both category and subcategory levels.

It is also crucial to have good visibility of your contracts, dates, payment and commercial terms.  Together (with a robust spend data management), this will help you keep track of any loss in working capital management. Once complete, segment and choose suppliers to be included. Most successful programmes involve at least 60% of their supplier base in the SCF programme.

  1. Review internal processes and systems 

Finally, review processes and systems – Are your systems aligned to contracts?  Do you have a working P2P system? How do they help manage supplier relationships?

Make sure any changes to internal processes and systems suit your suppliers and you have correct anti-money laundering checks – some supply chain finance providers are getting tougher, particularly banks. Make sure all documents are signed by those with the correct legal authority and create a proper folder of documentation.

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