Automating the Cash Conversion Cycle

While world trade shrank significantly at the end of 2008 and the start of 2009, conditions improved towards the end of last year. Nevertheless, it is clear at the start of 2010 that trade flows have a long way to go before returning to the levels before the financial crisis. In the current economic environment, it is more important than ever for corporates to optimise working capital to ensure they are well-placed to benefit from any strengthening in international trade. While the worst of the credit crisis may now be behind us, it is clear that its effects are still influencing the availability of credit. Corporates continue to find credit comparatively expensive and difficult to access.

One thing is clear – corporates that are looking to minimise costs while optimising cash and unlocking value from the supply chain are likely to be better placed to withstand any lingering malaise that remains as the global economy recovers. A drive to operate as efficiently as possible during periods of difficult or changing market conditions has caused some significant changes to behaviour patterns of market participants. In particular, there has been a trend for corporates seeking bank-independent solutions to mitigate payment and counterparty risk.

Corporates are looking to allocate meaningful transaction business among their banking syndicates without sacrificing the operational and interest efficiencies achieved through tax-efficient shared service centre (SSC) or payment factory solutions. The pace of centralisation of procurement into SSCs/payment factories has typically lagged that of cash processes, but it is becoming more frequent among multi-national buyers. Advanced technology and automation processes are becoming increasingly essential in order to eliminate paper and process inefficiencies, as well as accessing trapped cash inherent in managing internal and supplier relationships. To assist in this process, banks are beginning to provide a single online client interface to manage supplier, treasury and commercial payments transactions, integrating their cash and trade offerings.

A supply chain finance (SCF) solution is often put in place in conjunction with an extension of payment terms by the buyer. The supplier is provided with the opportunity to accelerate their receipt of cash via sale of receivables to the funding institution, solidifying and strengthening relationships throughout the supply chain. The buyer is able to benefit from increased supplier satisfaction while improving working capital by extending payment terms. The automation of these processes can provide real-time visibility and information, which can help to support improved analytics for decision-making purposes.

The centralisation of purchase-to-pay (P2P) processes into an existing SSC environment using integrated technology can deliver a number of key advantages. These include a reduction of operational and administrative costs, as well as helping to minimise errors that cause non-straight-through processing (STP) ratios to increase and reduce bank fees for repair.

An SCF solution can also support the consolidation of transaction processing to manage a single file transmission covering supplier, treasury and commercial payments transactions. There is also the potential to streamline this further with automated direct debit processes between group accounts held within the same bank.This kind of approach can also offer the flexibility to include syndicate members in the financing element to maintain corporate relationship targets while achieving key operational efficiencies, such as the consolidation of payment traffic with one trade and cash provider.

Cash and Trade

Corporates’ focus on the optimisation of working capital means that new avenues to maximise access to cash are being pursued vigorously. This is causing a change in the way corporates perceive cash and trade. For the past two decades, cash and trade have been treated as separate entities by corporates and banks – despite the fact that they usually are grouped together within transaction banking. However, there was little impetus for cash and trade to come together until the shortage of credit forced the issue.

The decline in trade volumes and increase in trade risks – coupled with the unprecedented decrease in availability, and the increase in cost, of credit – has finally put the joining of cash and trade on the agenda for both corporates and banks. The centralisation of supplier relationships and procurement has taken secondary precedence in comparison with the drive and focus of corporates on the centralisation of payments and cash processes. Although some institutions have moved to centralised procurement, they have been few in number and have initiated it to secure potential tax benefits.

Supply Chain Financing

In recent years, the trend has been to extend payment terms for suppliers in order to support buyers’ working capital. There is now an acknowledgement that, in some cases, suppliers are in danger of being pushed too hard by such payment terms since they are purely focused on maximising the working capital arrangements of buyers. As a result, there is a developing focus on supplier relationships and the creation of discount-based finance schemes. These initiatives are starting to become more popular, as they can assist suppliers in avoiding some of the worst effects of the extension of terms.

However, linking payables and cash and SCF have proven to be a technical challenge. Integrated systems can manage and reconcile payments across multiple supplier categories, including:

  • Those taking part in a buyer’s SCF programme on an early payment, discounted basis.
  • Those participating in a buyer’s SCF programme who have not chosen to discount specific invoices (and pay them on their usual due date).
  • Those not participating in the buyer’s SCF programme (and paying invoices on their usual due date). The most important factors for clients are that there is a single interface and single channel for the three types of payments, and that the solution is adaptable for a variety of structures.

Fully-integrated Solutions

These integrated solutions can be used for both domestic and multi-currency relationships and give corporates the option to parcel out financing business to a wide number of syndicate banks without losing operating efficiency. Although participating third-party banks are providing credit to suppliers rather than the buyer, the lending is generally seen as working capital for relationship purposes. The benefits of an end-to-end payables and supplier finance solution are proving attractive to corporates who are keen to maximise their working capital. Already, many have seen considerable improvements to their days payables outstanding (DPO) driven by strengthening relations with key suppliers.

Further integration

The integration of payments and SCF is the first step in further automating the entire value chain. A ‘hands-free’ end-to-end payable and supplier finance solution could be extended to include other offerings from your bank, including liquidity management and foreign exchange (FX). The end result of the payable and supplier finance solution is an improvement in working capital, which means money is available for physical cash concentration or virtual pooling (while remaining in-country) and can provide resources for short-term investment purposes or to net-off balances and lower bank interest.

Physical cash concentration or virtual pooling can be linked with the payable and supplier finance solution and then further integrated into a short-term investment solution based on pre-agreed margins, benefits and strategies. This means that from the time that a corporate uploads a payment file to cash going on account the process can be entirely automated.

FX capabilities can also be integrated to enable automated, efficient currency management strategies. The creation of a solution enabling a client to deliver a single batch of files covering multi-currency payments (based on agreed rates) will be highly valued, and further integration will provide significant rewards for corporates to overcome such challenges.

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