The disruption of the past two years has transformed working capital management from best practice to business critical, and corporates are increasingly turning to their banking partners for support. But to make the most of what’s on offer, they need to achieve the right alignment internally.


The events of recent years have placed unprecedented strain on corporate profitability and balance sheets. With soaring input prices, supply chain disruption and rising borrowing costs, finding the headroom to invest in strategic priorities has become increasingly challenging.

As corporates scramble to shore up suppliers and inject resilience into their value chains, the demand for supply chain finance (SCF) has skyrocketed. In 2021 alone, Santander enabled over 400,000 suppliers to benefit from early payments from their buyers through 6,700 active supply chain finance programmes, boosting their commercial relationships and allowing them to hold on to cash for longer.

“Overseeing the working capital strategy is the responsibility of the CFO, but procurement plays an important role in executing that strategy,” says Ángel Bustos, global head of supply chain finance at Santander. “However, often, their priorities and objectives are not fully aligned.”

In a traditional corporate set-up, there is no direct link between purchasing performance and financial performance as the metrics differ – the first uses negotiated or contracted savings while the second is based upon realised savings at the profit and loss level.

“Supply chain finance solutions have evolved towards helping treasurers to improve financial ratios while offering value-added solutions that also help procurement to reinforce strategic relationships with suppliers,” adds Bustos.

The growing importance of environmental, social and governance (ESG) has further reinforced the relevance of co-operation between the two functions. As senior procurement leaders seek to implement strategic sustainable purchasing programmes, sustainable SCF, which links financing to ESG performance, can enable CPOs to create more ethical companies – while at the same time unlocking competitive value for the CFO.


A change in mentality from just-in-time to just-in-case

But supporting suppliers is not the only focus.

A series of unexpected issues that have wrought havoc on global trade have turned the agile just-in-time inventory model on its head. With geopolitical tensions, port blockages, supply shortages and shipping issues disrupting the flow of goods around the world, getting goods to the right place at the right time to avoid stockouts has become a top priority.

“Supply chain issues are here to stay. First it was Brexit, then the US-China trade war, then the Suez Canal blockage and then Covid, then the Ukraine invasion. What may have seemed like a temporary problem at first has become a new reality that corporates are having to adapt to,” says Juan Suarez, global head of origination for trade and working capital at Santander.

Here, CPOs are playing a leading role in protecting their businesses: from strengthening strategic partnerships with key suppliers to re-evaluating their existing processes, switching packaging, or substituting components. For most companies, de-risking their supply chains has meant building in buffer stock to provide a safety net in the form of an additional layer of inventory. However, for buyers this approach comes with an increase in the average days inventory outstanding (DIO) – an efficiency ratio that measures how long cash is tied up in inventory – which according to PwC’s latest Working Capital Report, has risen globally by 6% since the second quarter of 2019.

While the impact hasn’t been felt equally across regions or industries, 12 out of 17 of the sectors analysed by the professional services firm reported an increase.

“Across sectors, corporates now have much more inventory on the balance sheet than a year ago, and that inventory held in the balance sheet is extremely inefficient and has an enormous negative impact on working capital and leverage ratios,” says Enrique Rico, global head of structured trade and trade funding at Santander. “As a result, we’re receiving growing numbers of requests from clients to help them managing this.”

One solution that is growing in popularity is inventory finance, which can be used alone or to complement other solutions such as supply chain finance programmes. Offered by Santander since late 2021 in light of the ongoing supply chain disruptions, the structure matches seller and buyer needs, where buyers seek to increase buffer stocks without balance sheet impact in order to reduce the risk of shortages, while sellers aim to accelerate sales with the objective of absorbing increased working capital requirements.

However, ensuring the success of these solutions requires alignment between the finance and procurement function.


Ensuring alignment

“For inventory finance products to work, the CFO and CPO need to work hand in hand,” says Rico. “These products have very relevant advantages to the CFO when it comes to working capital needs and accounting treatment, but they are also aligned with the CPO’s interests, whether it be volume or prompt payment discounts or guaranteeing supply”.

Together with inventory finance, pre-shipment solutions are also a strategic mechanism for both CPOs and CFOs. “If I advance payment for, say, a microchip or lithium for batteries for four years, the supplier will prioritise me over other buyers,” he adds. “This is no longer just a matter of negotiating the price a little; it is a strategic lever to ensure supply at a time of global component shortages. Inventory finance allows the CPO to be able to put that proposal on the table without it becoming a balance sheet problem for the CFO.”

In many cases, the CPO needs to become a strategic leader and advocate for greater operational effectiveness – a natural progression for a function that has the passion and ability to get the best prices, manage their supply chain, and become more resilient. Managed correctly, CPOs can become key allies to CFOs when it comes to driving working capital management success and assuring business continuity.

“We’re seeing an interesting shift in our conversations with clients,” says Suarez. “Previously, the CPO would not tend to be present at the first meeting since discussions would generally be led by the CFO. Increasingly, forward-thinking companies are bringing together the two functions, and once the CPO gets involved and understands the benefits inventory finance, pre-shipment solutions or SCF can bring, they champion the opportunity.”

When well planned and executed, strategic procurement can be one of the most effective tools in a CFO’s arsenal to improve working capital. However, this is only possible when companies break down the siloed approach between functions.

“At the end of the day, both finance and procurement have entangled financial responsibilities,” says Rico. “By coming together, the CFO and CPO can give their organisation a competitive advantage, boosting working capital performance at a time when this has become a strategic priority.”

With multiple operational and strategic risks to manage, for many corporates, 2022 has become a

year of reinvention. But by strengthening the integration between the finance and procurement teams, corporates can find new ways of working to mitigate disruptions and ensure maximum value delivery – even in the toughest of trading environments.


Putting it into practice

Due to the ongoing supply chain disruptions, a large Latin American consumer goods company with operations across the region found itself forced to

build up buffer inventory to mitigate against potential future stock interruptions. Thanks to Santander CIB’s inventory finance solution, the company was able to achieve its objective of increasing its immediately accessible inventory without impacting its cashflow or balance sheet. As a result, in 2022 alone, the company will achieve the release of US$400mn of trapped cash, improving its cash conversion cycle by 35 days.