A shift away from constant stress over cash flow and cash position does well for businesses. Identifying the levers for business growth is critical.
Supply-chain finance is worth consideration. It offers a return on low-risk investment and protection for your supply chain. But not all supply-chain finance options are equal.
However, there are a few best practices for supply-chain finance that are universal.
Supply-chain finance as a growth strategy
Supply-chain finance helps multinationals and SMEs put cash to work in each geography rather than remain “trapped.”
It also supports your supply chain and helps you respond to increasing fulfillment pressures.
In the last five-to-ten years, there’s been a lot of supply chain transformation, especially in the developed world. Emerging markets need these services to power their growth and global competitiveness.
Key trends in trade finance:
- Dynamic discounting: No-risk, you are receiving a discount on the money you already guaranteed to pay your suppliers with.
- Invoice financing: Instant access to receivables rather than waiting 30, 60, or 90 days for payments from buyers.
Aim for long-term value over short-term metrics
Since 2008, companies have been managing the cash conversion cycle (CCC) metric through days payable outstanding (DPO). As a result, payment terms across industries and regions have extended significantly. Finance executives are incentivized to improve the cash conversion cycle even as it puts pressure on their supply chains.
How to gain value in the long term:
- Companies in a good position, understand that a Naira of EBITDA is more important to investors than a Naira of cash on the balance sheet.
- Be less obsessed with cash conservation.
- Expand your strategy to put the cash on the balance sheet to work in ways that offer a return on investment and strengthen supply chain health.
The innovation and opportunity of trade finance
Trade finance is a broad term. Technically, it covers any time a third party facilitates the transaction in trading goods and services. Historically, trade finance meant a letter of credit or supply chain finance. The third party would have been a bank.
Today, innovation in trade finance is through tech companies, not banks. The change is as much a shift in mindset as it is technology, by viewing a receivable as a form of currency and figuring out how to monetize it. Tech companies offer trade finance alternatives from invoice discounting and invoice sales, to purchase order finance and factoring.
Think strategy first, then the solution.
The trade finance option you choose is not a strategy in and of itself. To succeed, you must set your strategy and prioritize your goals for payment terms, supply chain health, and return on investment. Once you have a strategy, then find the right “working capital mix” of trade finance that supports your goals and the full spectrum of your supply chain.
For example, supply chain finance doesn’t provide value for you as a return. The value is in terms of standardization or terms extension and support for your largest suppliers.
Best practices to consider as you develop your strategy:
- Prioritize the liquidity of suppliers.
- Use banks to build cash, while using the balance sheet as much as possible to boost margins.
- Consider a mix of trade finance solutions to fit needs across the full spectrum of your supply chain.
- Limit your reliance on a bank or single entity for your overall strategy.
- Speeding up payments, whether on the receivables or payables side, always improves margins.
- You must protect your business and your supply chain regardless of what is happening in the market.
- Suppliers often need a trade finance option but may be concerned about protecting their revenue stream and not be forthcoming about liquidity issues.
How to succeed:
- Own your strategy that aligns with your company’s overall goals, and then own the governance as well.
- Be willing to use your balance sheet in a way that preserves the long-term health of your organization. Use it to help suppliers that may be stuck in high-interest-rate positions and not able to achieve the type of fiscal health they need to be your best business partner.
- Finally, there’s never going to be the best, right business cycle to do something. Every day you take 40 days to approve an invoice, it costs you value. Connect yourself to good partners who can help you get that value now.
Bridger streamlines your B2B business workflow, simplifies sourcing, invoicing, and payment processes, and provides the financing you need to fuel your business ambition.