Larger corporates are increasingly turning to supply chain ﬁnance programmes to optimise their working capital – but difﬁculties with supplier onboarding can be a stumbling block, explains Adeline de Metz, Head of Supply Chain Finance Solutions at UniCredit.
Optimising working capital is important for any company. Freeing up cash from both sides of the balance sheet can boost efﬁciency, reduce dependency
on outside funding and release funds for strategic business decisions. And while large companies have traditionally been less active in the ﬁeld – especially when liquidity is in plentiful supply – many are refocusing their efforts. In particular, these companies see working capital management as a valuable way of offsetting large-scale capital expenditure, aligning different departmental priorities and achieving ﬁnancial key performance indicators (KPIs).
Receivables ﬁnance, of course, is one of the key techniques for achieving these goals, but comprehensive supply chain ﬁnance programmes are also coming to the fore as an invaluable tool. However, supplier adoption for these programmes can prove problematic due to difﬁculties with the onboarding process. Banks must therefore look to mitigate these issues through on-the-ground support – potentially also collaborating with third-party platform providers and ﬁntechs to provide a more seamless service to their clients, especially in remote geographies.
Large ﬁrms intensifying their focus on working capital management
Certainly, with the current low-interest-rate environment rendering borrowing an attractive option, large corporates have a fresh incentive to reassess their working capital management activities. At the same time, an increasingly data-driven ﬁnancial world is putting ever more emphasis on KPIs – ﬁgures which can be improved through judicious use of working capital techniques. Receivables ﬁnancing, for example, represents a valuable tool for corporates looking to boost ﬁnancial KPIs such as return on capital employed (ROCE) and days sales outstanding (DSO).
What’s more, a thorough look at the possibilities reveals many more opportunities for larger corporates to drive value through working capital management. For instance, while larger ﬁrms are typically less concerned about generating liquidity than their smaller counterparts, they are also more likely to invest in large-scale capex projects, where it can take months or years to generate returns. Receivables ﬁnance can again be of value in this respect – introducing liquidity and softening the ﬁnancial impacts of large, one-off negative cashﬂows.
Supplier ﬁnancing programmes can also help here by enabling companies to extend their payment terms in return for helping their suppliers secure funding quickly and at competitive rates. This not only gives large corporates extra time to gather the funds needed to meet their other obligations, but also helps them resolve conﬂicting priorities and objectives between different company departments, such as procurement (which looks to reduce the cost of suppliers) and treasury (which is concerned with working capital and therefore has a vested interest in the stability of the suppliers).
Supply chain ﬁnance can bring these opposing priorities together, allowing procurement departments to negotiate competitive rates with suppliers, while also bolstering the company’s working capital position. Securing better payment terms in this way not only improves KPIs such as DPO, but also enhances the relationships between buyers and suppliers. This breeds trust and reliability, as well as ﬁnancial stability along the supply chain.
Smooth supplier onboarding needed to drive adoption rates
But despite the beneﬁts of these programmes and the importance of a robust buyer-supplier network, troubles with supplier onboarding have meant that supplier ﬁnancing programmes have not always been successful. Although companies and their banks have invested in new technologies and drawn up detailed and rigorous contracts, supplier onboarding difﬁculties persist – limiting both adoption rates and the beneﬁt to the supply chain.
Supplier onboarding therefore needs to be a focus for banks providing these services. Developing a tailored onboarding strategy for each client is an important part of this. With UniCredit’s clients, for example, we sort suppliers into strategic and non-strategic segments, with speciﬁc approaches developed for each segment.
It is also important to recognise that, while buyers are often large corporations, their suppliers are often small and medium-sized enterprises that might be based in different regions across the world. Connecting diverse corporate segments, and ensuring companies engage with their smaller suppliers in the right way, can therefore be instrumental to success. Banks can help by using their local and sector-speciﬁc expertise – communicating with suppliers in their local language and observing local know your customer (KYC), and other, regulations in their home countries. This gives suppliers greater conﬁdence and stronger relationships with their buyers, with adoption rates boosted as a result.
Of course, new technology can also simplify the onboarding process. At UniCredit, for instance, we currently offer a user-friendly and intuitive global supply chain ﬁnance platform for invoice discounting. This reduces processing costs, gives a clear overview of the entire invoicing process for both buyers and suppliers, and greatly simpliﬁes the handling of payables and receivables. Solutions of this kind – particularly when able to accommodate new suppliers quickly and painlessly – will be central to corporates’ progress as they look to integrate more working capital management initiatives into their workﬂows.
Banks should also remember that they are not alone in this endeavour – and much value can be derived from collaborating not only with corporates, but also with third-party platform providers. A combination of bank expertise, corporate perspective and ﬁntech innovation promises formidable advantages, and could be the key to more sustainable, more adaptable solutions in the future.