Faced with the options of cash to fund a corporate finance strategy or cash to meet a 30-day supplier schedule, the revenue-generating activity will be more alluring. However, while extending payment terms might be good for building cash balances, what happens if the supplier goes out of business while they wait
Enter payables finance
In 2017, we heard much talk about “made in the world” – the idea that, as the design, production and assembly of products is completed across more and more geographies, logistics risk rises, not least of which is the resilience and financial stability of the supplier. In this context, and responding to numerous questions from our clients, we published the first edition of Payables Finance: A guide to working capital optimisation in January 2018.
When corporates implement a payables finance programme, they look for something that meets the exact needs of their business. Is the programme user-friendly and easy to set up? Can a specific provider meet its required needs in the geographies where it does business? Does the provider have the capacity to on-board the required suppliers quickly and efficiently?
A comment from Electrolux, the Swedish multinational home appliance manufacturer sums this up. “Today, when payables finance providers approach us, I look for evidence of global coverage,” says its head of treasury/CFO. “Can the provider support our global needs? Can the provider support our buying entity in North America and our suppliers in Asia? Can they respond in the same time zone and in the same language? This is very important to us.”
Given that corporates typically mandate one provider and use them for at least four to five years, they have to be certain that their funding structure meets appropriate accounting standards. They need to be sure that the legal documentation is secure and enshrines all rights, duties and obligations of the provider. And last, but not least, they need to be sure that their programme is compliant with global, national and regional regulation.
Fast-forward almost two years to today, the focus has shifted beyond definitions – the Standard Definitions for Techniques for Supply Chain Finance have had time to bed in and other issues have emerged.
Accounting practices that surround payables finance have now been thrown into the spotlight and are discussed in detail in this new edition. The dramatic collapse of British construction company Carillion was driven in part by the firm’s accounting for contracts under its payables finance programme, which obscured its financial difficulties until it was too late. Since then, scrutiny has weighed heavily on how payables finance programmes are audited. Anil Walia, EMEA Head of Supply Chain Finance at Deutsche Bank explains that “further clarity of the product offering and structure is needed to avert the danger of a negative watershed event for the SCF business.” This edition sets out to help this process.
Spotlight on sustainability
Over the past two years, the implementation of sustainable practices has risen high on business agendas, with senior management teams realising the benefits from both a brand and business perspective. Innovative companies have been using payables finance as a way to encourage such sustainable practices right down the supply chain – offering incentivised rates of financing to those that meet certain sustainability criteria.
Barriers to the widespread adoption of sustainable supply chains remain, however. With supply chains fast becoming global, the number of participants that need to buy into the sustainability agenda is huge – a situation further complicated by the lack of global standards for what constitutes sustainable practices. This will be a challenge but if the industry can overcome these hurdles, the untapped potential is colossal.
Given how far payables finance has come since its humble beginnings more than 30 years ago, it will be interesting to see how new technologies and ever-evolving global supply chains shape this transformational form of working capital management in the future. While technological developments in areas such as AI and blockchain are areas to be watched, the focus is on ensuring that all suppliers, large and small, have positive on-boarding experiences and receive their payments through a system that enables everyone to be a winner while maintaining safety, soundness and transparency.
Global Head Trade Finance and Chairman of ICC Banking Commission
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