Navigating Financial Supply Chain Management

Business is tough these days, isn’t it? There is just no escaping the pressures coming from customers and suppliers. It’s hard enough to keep the ship on course, but add to it all the other dislocations that have come as a result of the financial crisis – and you’ve got the perfect storm of troubles. That’s the bad news. But there are some unintended positive consequences from the market mess of late – especially for an astute financial manager.

There has never been a better time to address some of the big issues in the company’s financial management that goes far beyond debits and credits. For a variety of reasons, now might just be the best time to propose innovative programmes that will improve working capital management; take operating costs out by streamlining processes; and to use your company’s financial strength as an effective marketing tool to gain more business. As one of President Obama’s advisers said: “Never waste a crisis.”

Liquidity management is a big issue these days, with the US government recently releasing data showing that last year US banks posted the sharpest decline in lending since 1942. Europe has similarly grim statistics showing tight credit markets that just won’t come unstuck. Today, however, there have never been more ways to improve working capital management and ease the constricting effects of tight credit.

Improving Cash Flow

One of the most effective ways to improve cash flow is by increasing the proportion of customer e-billing. A recent study by Bacs showed that 74% of the UK’s adult population was positive about direct debits. Regardless of whether your customer base is consumer or business, increasing the proportion of electronic transactions will serve your company well. You’ll have far more predictable cash flow and lower days sales outstanding (DSOs) with more people opting into the direct debit option. Getting behind the EU’s new single euro payment area (SEPA) Direct Debit (SDD) scheme will make it easier for you to bill and collect funds electronically across the eurozone. Many companies have also been very successful in launching focused marketing campaigns to increase their e-billing population.

A related initiative is e-invoicing. Although e-invoicing has been around for years, only recently has there been a confluence of factors that have brought mass adoption just over the horizon. Today, only about 30% of all invoices are sent to customers electronically in some form – around 90% of all invoices received are processed manually. When you consider that it costs the typical accounts payable department about US$100 to manually process an invoice versus about US$2 for fully-automated processing, there is a very compelling business case for both sides of e-invoice presentment capabilities.

In addition to lower processing costs, e-invoicing results in greater predictability and visibility of cash in-flow as well as lower DSOs. By developing the capability to send and receive e-invoices, corporations will build the key ingredient to greater efficiency in their financial supply chain (FSC).

Building the ultimate e-invoice presentment and payment (EIPP) infrastructure is a long-term goal that takes years of planning and implementation, not to mention a large financial commitment. And it’s not complete until this capability is connected to an enterprise resource planning (ERP) system, which further automates the financial reconciliation process with the rest of the organisation. But there are many smaller steps that can be taken that begin to move the financial relationship with trading partners into the 21st Century.

The expanding use of remittance data in transactions is one trend that is moving full-speed ahead and will have a significant impact on the entire FSC and all of its participants. To a corporation, it means being able to send and receive payments that include key remittance data such as invoice numbers. This isn’t the ultimate solution to streamlining the order-to-cash (O2C) or purchase-to-pay (P2P) cycles between trading partners, but it does get your transformation to a modern finance department underway.

Being able to connect a payment to its underlying invoices will reduce the amount of internal and external research needed for full reconciliation, lowering processing costs. Central banks around the world are beginning to enable the inclusion of this data with transactions. The US Federal Reserve recently mandated that all wire transfers have the capability to include remittance data with the transaction. Other payment networks have been offering this capability for years with minimal take-up by corporates. Financial systems from SAP to Quickbooks are all supporting this remittance data – so it is widely available to all your trading partners of any size.

Marketing Benefits

In addition to using these systems to streamline your operations, leading to better financial management and performance, there is another side to the story with similarly compelling benefits. Optimising the FSC has the potential to provide strong marketing benefits to the organisation – beyond simply better customer service in the billing process.

Considered the potential of offering instant credit to customers with these e-invoices? By having an option on the e-invoices you send that says: “Want instant credit now?”, your customers can finance their purchase with credit from your bank that is offered based on your credit rating. This so-called reverse factoring allows your customers to leverage your good credit rating to get better finance terms than might otherwise be available to them.

Your bankers will appreciate this as they are now able to tap into your trading partners to expand their loan business. This is a major opportunity for banks and this capability is being built by leading banks around the world.

This is an example of the finance department becoming directly involved with the marketing and sales process. Not only will e-invoicing make you the easiest vendor to do business with – saving you and your customers a significant amount of processing time – but you will also be offering a new more convenient way to get trade credit. And inasmuch as easy trade credit has been a key aspect of purchasing goods, this makes you a more attractive vendor.

All of this is related to the greater globalisation of business and the need for better financial processes for long-distance commerce. The internet now makes it possible for any company – even those run from the kitchen table – to source goods from around the world. As a result, the advent of open account commerce has made it much easier to do business globally. But with long distances come long supply chains. And especially for small companies with fewer resources, there has never been a greater need to expand trade finance and make the process of obtaining such financing faster and easier.

That is the concept behind the FSC – the flow of data and transactions should happen in a constant and seamless stream. Banks have a big stake in the development of these capabilities. For a long time, banks have been stuck at the end of this chain – only processing the transaction to either send or receive a payment. With the advent of the FSC – having access to your e-invoice data enables them to see what funds you will have coming in and out, enabling banks to offer a whole new set of services that will help you better manage your cash. They will be able to offer you liquidity management services that will help you to have just the right amount of cash on hand – not too much that you are not getting good returns on your idle cash; and not too little so you need to tap into your line of credit – so-called ‘just-in-time cash’, which is similar to the physical supply chain most companies have been managing for years. Of course, banks will find ways to turn this data into valuable fee-based services.

Over the past 18 months, the finance departments of many companies have proved just how vital their day-to-day work is to the organisation. With the prospect of a ‘new normal’ where the economic situation will continue as it is for quite some time – now is the best time to look into new ways to improve the financial operations of your company with some of the new systems and technology that is available from leading banks. These new services are being developed around the world by banks of all sizes. Set sail for a new course – where payments become an integral part of your business strategy.

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