Companies Neglect Risks in Supplier Financing

There is always one place that companies can look to release cash, minimise risk and mitigate the volatility of their liquidity – and that is in their own financial supply chain. As a result, interest in this year’s Financial Supply Chain Survey was high, with responses from 242 individuals from companies in a range of regions (39% were from western Europe, 28% from North America and 18% Asia-Pacific), varying in size (56% had a revenue less than US$1bn and 44% greater than US$1bn) and across a variety of sectors including manufacturing (27%), service and media (14%) and energy and mining (8%).

The survey asked where exactly in the financial supply chain companies are trying to improve their processes – and many reported that payment and commercial terms are a key area for improvement, although companies also have to maintain a protective attitude towards their suppliers rather than simply pushing costs onto them. The survey also asked what companies perceived as being the main risks they face in their financial supply chain – and the surprising finding was that supplier counter party risk is being overlooked by the majority of companies. Overall, companies need to raise their awareness of the financial risks that lie on the supplier side as it will consequently affect the corporates’ performance or strategic suppliers’ capabilities to deliver on obligations.

More than half of the respondents (58%) admitted that they had experienced a supply chain problem such as a payment default or delay in the past year. Although these kinds of ‘breakage events’ don’t happen too often, when they occur they have damaging and costly consequences such as loss of customers or a tarnished reputation, as many of the survey’s respondents testify.

The need for more accurate cash flow forecasting to improve financial supply chain efficiency was also highlighted by the survey results, as was the increased interest in trade finance instruments that provide security and cash conversion possibilities, such as letters of credit (LCs). Ethical and responsible business behaviour was also found to be important to 85% of the companies polled. This article analyses the survey results, which shed light on the perceptions and practices of those closest to the financial supply chain.

Is Your Supplier Risk Covered?

One of the most interesting findings of this year’s survey was that while companies, quite rightly, perceive several different risks in their financial supply chain, most of them are ignoring one big risk – and that is counterparty risk on the supplier side.

Only 6% of companies surveyed thought that counterparty risk on the supplier side was a number one concern, as shown in Figure 1 below. The three most prevalent risks that companies see in their financial supply chain are operational risk (30% of respondents chose this), followed by foreign exchange (FX) risk and counterparty risk on the customer side (both chosen by 27% of respondents).

Figure 1: Main Risks in the Financial Supply Chain

Source: gtnews Financial Supply Chain Survey 2011

Niklas Callerstrom, global head supply chain services, product management at SEB, says: “I’m surprised that counterparty risk on the supplier side has come in so low. It seems that companies are still very much focused on themselves and their customers, and are not looking backwards in the supply chain at the possible risks coming from the suppliers. I think this is a big mistake – they need to start looking at the whole supply chain.”

Levels of concern about counterparty supplier risk are low across all regions, industry sectors and company sizes. However, the survey found that there are different attitudes to FX risk. For example, 15% of respondents from North America said it was a primary risk, while far more western European respondents (43%) thought so. This possibly reflects that companies in western Europe have greater FX exposures, while some companies in North America operate predominantly in US dollars.

Callerstrom also noted that political risk was a number one risk for just 4% of the companies polled. The survey was done before protests spread across northern Africa and the Middle East in January and February 2011, and Callerstrom says: “Concern about political risk would have been far higher if the survey had been conducted after events in Egypt, Tunisia and the Middle East.”

How Can Banks Help with Supplier Counterparty Risk?

With an increased focus on risk mitigation generally, the survey also asked which areas of risk management have the most scope for better support from banks. The same three areas of risk came out on top – FX risk, counterparty risk (on the customer side) and operational risk. Mitigating FX risks is the main area where banks can provide expertise, according to Callerstrom.

Again, few corporates (6%) thought that their banking partners could provide better support for supplier counterparty risk. This is a bit of a misconception, as Callerstrom points out: “Banks can provide educational support, particularly for supplier counterparty risk. Banks can help their customers gain access to credit scoring information and make them aware of the credit history of their suppliers.”

While companies are concerned with the threat of non-payment from their customers, the risk of a strategic supplier going bankrupt, for example, is often not perceived as such a real threat to business. He adds: “We find that very often corporates haven’t identified the risks backwards in the supply chain.”

Supply Chain Breakage Events

So-called ‘breakage events’, such as a big client or key supplier going bankrupt, or simply defaulting or delaying a payment or delivery, can happen to anyone at any time. The knock-on effects of such an event can be severe, and Callerstrom highlights the recent disappearance of a key supplier in the automotive industry, which brought the entire sector in Europe to a standstill for a few days. He notes: “I’m surprised that 42% of the companies who answered this survey said they have never experienced a supply chain breakage event. I imagine that most corporates have had difficulties with suppliers at some point in recent years.”

Figure 2: Consequences of a Supply Chain Breakage Event

Source: gtnews Financial Supply Chain Survey 2011


As can be seen in Figure 2, an unexpected interruption in the financial supply chain can have costly consequences for companies, including delayed projects (22% of respondents have experienced this is the past year), loss of customers (this has happened to 12% of companies surveyed in the past year), damage to brand and reputation (7%) and even a drop in share price (7%).

Companies need to avoid these types of scenarios at all costs, and Callerstrom suggests that an attitude of protection needs to be developed towards other parties in the financial supply chain. He says: “We have helped some of our clients to safeguard their suppliers, which is the kind of support that I think is important.”

Patrik Zekkar, head of trade and supply chain financing at SEB, adds: “Suppliers are a key factor for the success of a company, so the old-fashioned approach of pushing costs down onto the supplier may not be the most sustainable way to protect the supply chain. Companies should instead be looking to support their suppliers and recognise them as an integrated part of the overall successful delivery to the end client.”

In order to manage the risks surrounding a financial supply chain breakage, companies need to have detailed knowledge of their clients and suppliers and this, according to Callerstrom, is where many companies fall down. “We have seen even large clients with surprisingly little awareness of the quality of their suppliers and their financial situation. We can help by looking into the supplier’s financial reports and raise our clients’ awareness of risks throughout their supply chain.”

Of companies in the service and media sector, 51% believe that a breakage event led to a higher cost of capital.

Managing Import/Export Risks

The survey found that 57% of companies are using LCs to manage their import and export risks on the buyer side (the supplier side is similar at 56%). Zekkar says: “The LC is the only instrument that provides a legal framework in all jurisdictions under ICC [International Chamber of Commerce] regulations. So from that point of view, the treasurer is comfortable that an insurance instrument backs the payment. There are two ways in which an LC is more cash-convertible than an invoice: first, it can more easily be discounted; and second, you can enhance the cash turnaround by speeding up the presentation of the LC documents. With an invoice, a customer might have a fixed payment date of 60, 90 or more than 100 days and there’s nothing that can be done about it.”

As illustrated in Figure 3, credit insurance and credit agency scoring were also popular choices among the survey’s respondents (used by 31% and 29% respectively on the buyer side, and by 19% and 30% on the supplier side).

Figure 3: Managing Import/Export Risks

Source: gtnews Financial Supply Chain Survey 2011

While the LC is still predominantly used in emerging markets, it has regained some popularity in western Europe and North America. However, most trade in these two regions is still done on open account. Almost half (47%) of the companies polled in the survey said that they use buyer insurance to manage their open account risks.

Capital Scarcity – Is Your Balance Sheet in Focus?

The survey asked whether the scarcity of capital will increase the organisation’s focus on their own balance sheet and supply chain. Fifty-three percent of respondents said that they will increase their focus on using the possibilities within their own balance sheet before using bank overdrafts/loans. A further 44% said they would not change their focus as a result of scarce capital; however, it is not clear if they may have already been focusing on the supply chain and balance sheet. Just 3% said they would focus less on their supply chain and balance sheet as a result of scarce capital.

The survey also asked how companies are planning to use the balance sheet in future and 59% said that they plan leaner management of their supply chain in general. A further 37% said they would consider launching a supply chain finance (SCF) programme. Half the companies were planning to gain efficiencies on their balance sheet by using trade finance instruments – 22% cited discounted LCs, while 28% said they would use more guarantees in emerging markets.

SEB’s Zekkar explains that increasing LCs usage or other trade finance instruments is not always easy: “Companies could have difficulty in explaining to an existing buyer why they want to begin using an LC – although the fact that an LC can more easily be converted into cash is a good reason. Introducing LCs for new buyers or suppliers is more straightforward.”

Trapped Liquidity in the Financial Supply Chain

In the current financial climate, cash is tight for many companies so corporate treasurers and chief financial officers (CFOs) have been looking in all sorts of places for that extra bit of trapped liquidity. But where in the financial supply chain can most improvements be made? Most respondents (58%) thought that there was most room for improvement in the negotiation of commercial and payment terms.

SEB’s Callerstrom agrees: “This is a very strong area for improvement. Considering the financial supply chain as a whole can really improve cash flows and risk mitigation. The respondents have got it right when they say that payment terms are a key area for improving cash flows and working capital management.”

The areas of customer collection handling, customer invoicing and sourcing were all chosen by between 27% and 35% of the respondents, as Figure 4 shows. According to SEB, this question highlighted the potential that lies in the financial supply chain for improving working capital. Callerstrom explains: “We have several large corporate clients who have significantly improved their working capital by introducing efficiencies into their financial supply chain. Companies with a €2bn turnover were able to release an enormous amount of cash by extending their payment terms by up to 33 days. However, without giving something to suppliers, it’s very difficult to improve payment terms, so this is where a SCF programme comes in.”

Figure 4: Where Can You Enhance Performance in the Financial Supply Chain?

Source: gtnews Financial Supply Chain Survey 2011


Even more companies in North America – 63% – see the negotiation of payment and commercial terms as an area for improvement. Fewer small companies see it as an area for potential improvement – 43% of companies with revenue of less than US$10m chose that option, which is a noteworthy difference compared to the 64% of companies with revenue greater than US$10bn.

The results also varied according to industry sector with, for example, 85% of companies in the service and retail sector believing that they could improve their financial supply chain performance through negotiations in their commercial and payments terms, while just 40% of retailers shared that view.

How Much Cash Should be Kept on the Balance Sheet?

The survey asked how much cash, as a percentage of assets, companies would ideally like to hold on their balance sheets. The majority of companies – 83% – said that they would like to hold up to 25% cash on their balance sheet, with 42% indicating that less than 10% was ideal and 41% saying 10-25%.

The results vary slightly according to size of company, with 50% of all of the larger companies (those with revenue greater than US$1bn) believing that they should ideally keep less than 10% cash on the balance sheet, while just 17% of smaller companies (revenue less than US$10m) gave the same answer. The results show that these smaller companies tend to think that slightly more cash on the balance sheet is preferable – 64% of them said they would keep 10-25% of their assets as cash on the balance sheet.

Zekkar says: “The percentage of cash on the balance sheet is usually a consequence of the level of volatility in corporate liquidity. Liquidity levels often correlate to the accuracy of the cash flow forecast so, as the survey shows, getting the forecast right has far-reaching effects for working capital efficiency and the balance sheet.”

Cash Flow Forecasting – Still a Shot in the Dark for Many

In fact, cash flow forecasting and reporting were cited as the greatest problem for most companies’ working capital management strategy – 42% of the survey’s respondents said this was their main challenge, as shown in Figure 5. The problem seems to affect companies of all sizes.

Figure 5: Main Challenge to Working Capital Management Strategy

Source: gtnews Financial Supply Chain Survey 2011


Callerstrom says: “Reliable cash flow forecasting and reporting is a basic necessity because without accurate information, all other financial planning is a shot in the dark.” Zekkar agrees: “It is strange that many companies fail in something that is so basic – the cash flow forecast is very much the starting point for everything else that the treasury does in terms of financial planning.”

Some of the factors that are preventing companies from achieving reliable cash flow forecasts are a lack of centralisation and the right IT infrastructure, but most importantly, many companies do not measure the accuracy of the cash flow forecasts. “If companies measured their cash flow forecasts,” says Zekkar, “it would really make a difference to how accurate they were.”

Seventy percent of companies also said that forecasting and planning was the main challenge for them in the overall management of liquidity. The result was similar across regions and company size, although smaller companies (revenue less than US$10m) say they have fewer problems with forecasting and planning – just 50% of them claimed it was a major challenge. Instead 33% of the smaller companies said that having adequate uncommitted facilities in place was a challenge to their liquidity management.

Almost a third (32%) of the respondents said that the primary focus of their working capital management strategy is the release of tied-up working capital. Ensuring financial flexibility was the focus for 29%, while 19% of respondents were more concerned with cost control. SEB’s Callerstrom says: “I thought that the release of tied-up working capital would be a main priority for far more companies, so these results are surprising.” The results suggest that companies in Asia-Pacific (50%) are more concerned with releasing tied-up working capital.

Concern Regarding New Regulations

As the banking sector faces the introduction of several new regulations, such as Basel III, the Dodd-Frank Act and anti-money laundering (AML) regulations, corporates are understandably getting nervous about what these measures will mean for them. The survey asked how concerned corporates are about the effect these regulatory changes will have on their supply chain and found that 13% of respondents were very concerned, while 66% were somewhat concerned.

The survey found that more companies outside western Europe and North America are concerned about regulations, with 33% of respondents from Asia-Pacific saying they are very concerned and 58% ‘somewhat concerned’.

The level of concern may be affected by company size – 50% of all respondents from smaller companies (revenue less than US$10m) were not concerned at all about forthcoming regulatory changes, while only 15% of large companies (revenue more than US$10bn) seemed unconcerned.

Corporates are quite right to be aware of pending regulations, according to Zekkar. “If you think that a few years ago, we had just one person at SEB dealing with compliance and we now have 70, this is a very big change for banks that is a direct result of AML legislation. It is natural that corporates will want to know how this will affect them,” he says.

Sustainable and Ethical

What do these words really mean in the world of business, where surely the bottom line comes before all other considerations? According to the survey, the environment and ethical, fair business practices are important to today’s treasurers and financial managers. Eighty-five percent of respondents said that fair relationships and ethical business practices were either important or very important to the organisation of their supply chain.

But, considering companies may like to think of themselves as being more ethical than they really are, are the survey’s results an accurate reflection of corporate practice? “Ethics are always important,” says SEB’s Zekkar. “We see this when our corporate clients ask us for details of our CSR [corporate social responsibility] policy because they want to know that they are working with a reputable bank.”

The survey also asked how the ethics of sustainability add value to the company’s financial supply chain. Thirty-five percent answered that adhering to ethical codes on sustainability was a positive influence in searching for new business opportunities. Thirty-one percent said that it enhanced the company’s reputation, while 22% believed that there was an ‘early adopter advantage’ for them and that sustainability in the supply chain will become the norm.

Smaller companies are more likely to see socially responsible behaviour in their supply chain as a positive influence in gaining new business – 50% of companies with revenue less than US$10m chose this option, compared with 32% of big companies (revenue greater than US$10bn).

Who’s Managing Your Supply Chain?

The last question in the survey asked who in the company is responsible for supply chain management and how that might change in future. The results were that the financial supply chain is managed by the CFO in 35% of companies, while in 28% of companies the treasurer is responsible. The procurement department is responsible for managing the financial supply chain in 29% of the companies surveyed. The survey found that 28% of companies had a dedicated supply chain manager, but only 19% of companies expected this role to be maintained in future.

SEB’s Callerstrom interpreted these results as an indication that the financial supply chain is gaining in importance and that the CFO is increasingly taking charge of its management. Zekkar adds: “To succeed in a working capital project, you need to have a strong sponsor within the company, and we see the CFO and treasurer increasingly taking on responsibility for the financial supply chain.”

He adds: “Having a dedicated supply chain manager is good but the role should not lead to isolation of the responsibility for the financial supply chain; the responsibility for an efficient supply chain should lie with everyone in the company.”

Figure 6: Who’s Managing Your Financial Supply Chain?

Source: gtnews Financial Supply Chain Survey 2011



This year’s Financial Supply Chain Survey highlighted several interesting trends and practices in financial supply chain management. It showed a serious gap in awareness, with far too few companies concerned about the risk on the supplier side of their financial supply chain. Few companies thought that supplier counterparty risk posed a major concern, and or considered it as an area where banks could lend more support. SEB’s Callerstrom aruges that companies need to identify risks throughout the whole supply chain and particularly on the supplier side.

More than half the survey’s respondents (58%) have experienced a supply chain breakage event in the past year, and these events have led to serious consequences such as loss of customers and damaged reputation. While these events are sometimes unavoidable, a greater awareness of risk in the supply chain could minimise their occurrence. Callerstrom notes that it is only surprising that as many as 42% of respondents claim not to have experienced a ‘breakage event’ and he suspects this percentage is in fact much lower.

Leaner cash management and the release of tied-up working capital are the priority for most companies polled in the survey and the results show that companies are looking for payment security and efficiencies within the balance sheet. The survey found that the LC is used by 57% of companies to manage their import/export risks, while 53% of respondents say they will increase their focus on using the possibilities within their own balance sheet before using bank overdrafts/loans. The negotiation of payment terms is also an area where companies (58%) believe they can make improvements.

Companies are worried about how forthcoming banking regulations will affect them while, internally, cash flow forecasting and reporting are also cause for concern with 70% of respondents naming this area as a major challenge for their overall liquidity management. By measuring the accuracy of cash flow forecasts, companies will be able to improve the forecasts, enabling them to better control their liquidity and balance sheet.

Despite some important challenges, the survey shows a buoyant outlook for financial supply chain management. Ethical and responsible choices are important to 85% of the survey’s respondents, with many associating their CSR policy with success within their industry. The management of the financial supply chain is also being given more priority within companies, and CFOs now have overall responsibility for it in 35% of companies.

Overall, some of the key challenges in financial supply chain management – such as attitudes to supplier counterparty risk, negotiation of more efficient payment terms and achieving accurate cash flow forecasts – are all issues that can be tackled through raised awareness, support from banks, and by changing company policy. Then many companies will see enormous improvements in their working capital and cash flows.


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