[Quick Funding Solutions]

Why CFOs Should Adopt SCF to Meet Cash Requirements



CFOs today depend on the strategic function of treasurers than in previous years. One reason why treasurers’ role has become more aligned to the CFO’s agenda is a direct result of the treasurer’s ability to unlock value within the organization at a low cost, and drive strategic objectives of the CFO, such as offering a more comprehensive view of cash and payments, acquisition strategies and capital allocation strategies.

In fact, securing low-cost financing is arguably the corporate treasurer’s primary objective. Among their many responsibilities, ensuring adequate access to liquidity at the appropriate level of risk and cost is imperative for the success of their role. Luckily for treasurers, there is no shortage of banks eager to discuss various funding arrangements, again based on the probable risk and cost of the FI (financial investment). These funding arrangements will most certainly come at a cost to the treasurer, and drawing down to access the needed liquidity will likely be treated as debt on the balance sheet.

Consider SCF (supply chain finance) as a dynamic solution to remedy the issue. While not a new strategy, SCF has yet to fully penetrate the corporate market. In a recent survey conducted by Kyriba and Spend Matters, only 10 percent of polled treasury professionals cited an active SCF program at their organization. Therein lies a tremendous opportunity for treasurers and CFOs to gain a strategic market advantage by adopting this proven, liquidity solution.

Additional Reading: The Most Important Value That a Truly ‘Strategic’ CFO Can Deliver

What is a SCF program?

At its core, SCF, or more specifically reverse factoring, is an arrangement where the corporation (buyer) enlists with banks to make payments on their behalf to suppliers. Reverse factoring provides suppliers with early payment of approved invoices, but instead introduces a third party to deliver invoice financing. Reverse factoring offers an attractive alternative to factoring programs for sellers, by offering a lower discount and more flexible terms than they would achieve on their own. For the buyer, reverse factoring offers an opportunity to extend DPO (Days Payable Outstanding), improving working capital while not hurting the liquidity of key suppliers.

As an alternative to reverse factoring, dynamic discounting programs are best suited for corporates that have excess cash and liquidity. This type of program is designed for organizations looking for an alternative to low yielding short-term investments as these programs typically yield in excess of 10 percent APR. With dynamic discounting, buyers pay their suppliers early using their own funds. The early payment discount is calculated based on a pre-agreed financing rate and the number of days remaining until payment was originally due. The earlier the payment is made, the greater the discount realized for the buyer.

So how does a SCF program help drive a broader capital allocation strategy?

SCF programs, especially those housed within treasury technology that also leverage cash management workflows, can greatly improve free cash flow – interest free – via a term extension where reverse factoring is introduced to soften the impact to relevant suppliers. Treasurers are better positioned to satisfy committed share buyback, dividend, acquisition or related milestone payments, or debt buyback targets given the influx of cash flow following reverse factoring program deployment.

Thus, as the CFO pushes out DPO, the liquidity position improves at no financial cost and without additional debt on the balance sheet. This brings us to an important point: SCF alone is not the strategy, but rather the strategy of the corporation is to improve liquidity, and SCF is the tool to execute against this strategy.

Why SCF programs work

It is key to understand that the buyer will have a superior credit rating than their suppliers. A survey conducted by JPMorgan found that 65 percent of corporate suppliers are sub-investment grade. In addition, many suppliers face uncertainty as to when they will be paid from their customers, which puts a tremendous strain on these smaller companies and their ability to manage operations. Given these financial and operational factors, suppliers are eager to obtain low cost, predictable financing, and therefore we have a SCF market.

The flows of a traditional reverse factoring transaction are quite simple. Let's consider the following example: the corporation extends payment terms on the supplier from 45 days to 65 days, picking up 20 days of liquidity. As of way of softening the impact of this extension and to ensure the critical supplier relationship remains strong, the corporate introduces SCF to the supplier. Through a web-based portal, all future AP invoices between the buyer and supplier are visible. The supplier can simply select the invoice(s) and tell the corporate to ‘pay me now’ on any day ahead of Day 65 (let's say Day 10 in this example). Then, a financial institution of the buyer’s choosing pays the supplier on behalf of the buyer on Day 10 at a reasonable discount. On Day 65, the buyer pays the full amount of the invoice to the bank. Given the bank’s liability is to the buyer, they are able to offer a discount rate of the prepaid invoice that is lower than the cost of funds for the supplier. So there we have it, a win-win-win for all parties.

Additional Reading: Making the Business Case for Supply Chain Finance

Where to start?

It’s important to recall that SCF is not a strategy in itself, but a tool at the CFO’s disposal to execute the strategy. To begin a SCF program, it is import to first recognize the strategic financial goals of the organization. This will often be found in understanding the corporate’s free cash flow targets, and capital allocation strategy (share buyback, shareholder dividends, M&A activity, etc.). In order to execute these strategies, sufficient cash flow generation is required, and SCF delivers cash flow, as previously outlined in this article. This point is critical to gain internal buy-in: SCF will help achieve the finance targets set by the board of directors. The adoption of SCF is not simply a treasury initiative, but rather will need the collaboration of accounts payable, procurement and corporate accounting. Given the various priorities of these groups, SCF at its surface can appear to disrupt supplier relations and the status quo. Thus, it’s critical for treasury to champion the value of SCF cross-functionally, and the strategic value it delivers in way of specific capital allocation commitments, EBITDA guidance, or free cash flow targets previously committed by the CFO.

Conclusion

Supply chain finance is a decades old, and proven finance solution that helps CFOs drive P&L improvements and economic value to their respective organizations. Today’s modern treasurer can benefit from implementing SCF programs in their organization to help improve free cash flow and working capital. Recent enhancements from leading technology companies, including services for supplier prioritization and supplier on-boarding, help ensure that CFOs achieve maximum adoption within the SCF program in a secure, yet comprehensive online workflow. In doing so, the treasurer is securing an influx of cash flow to satisfy capital allocation commitments, and/or offer an alternative form of supplier financing that can lower margins and improve EBITDA for the organization.

[CStewart]

For a long time I used to go to bed early. Sometimes, when I had put out my candle, my eyes would close so quickly that I had not even time to say “I’m going to sleep.” And half an hour later the thought that it was time to go to sleep would awaken me; I would try to put away the book which, I imagined, was still in my hands, and to blow out the light; I had been thinking all the time, while I was asleep, of what I had just been reading, but my thoughts had run into a channel of their own, until I myself seemed actually to have become the subject of my book: a church, a quartet, the rivalry between François I and Charles V. This impression would persist for some moments after I was awake; it did not disturb my mind, but it lay like scales upon my eyes and prevented them from registering the fact that the candle was no longer burning. Then it would begin to seem unintelligible, as the thoughts of a former existence must be to a reincarnate spirit; the subject of my book would separate itself from me, leaving me free to choose whether I would form part of it or no; and at the same time my sight would return and I would be astonished to find myself in a state of darkness, pleasant and restful enough for the eyes, and even more, perhaps, for my mind, to which it appeared incomprehensible, without a cause, a matter dark indeed.

I would ask myself what o’clock it could be; I could hear the whistling of trains, which, now nearer and now farther off, punctuating the distance like the note of a bird in a forest, shewed me in perspective the deserted countryside through which a traveller would be hurrying towards the nearest station: the path that he followed being fixed for ever in his memory by the general excitement due to being in a strange place, to doing unusual things, to the last words of conversation, to farewells exchanged beneath an unfamiliar lamp which echoed still in his ears amid the silence of the night; and to the delightful prospect of being once again at home.

I would lay my cheeks gently against the comfortable cheeks of my pillow, as plump and blooming as the cheeks of babyhood. Or I would strike a match to look at my watch. Nearly midnight. The hour when an invalid, who has been obliged to start on a journey and to sleep in a strange hotel, awakens in a moment of illness and sees with glad relief a streak of daylight shewing under his bedroom door. Oh, joy of joys! it is morning. The servants will be about in a minute: he can ring, and some one will come to look after him. The thought of being made comfortable gives him strength to endure his pain. He is certain he heard footsteps: they come nearer, and then die away. The ray of light beneath his door is extinguished. It is midnight; some one has turned out the gas; the last servant has gone to bed, and he must lie all night in agony with no one to bring him any help.

I would fall asleep, and often I would be awake again for short snatches only, just long enough to hear the regular creaking of the wainscot, or to open my eyes to settle the shifting kaleidoscope of the darkness, to savour, in an instantaneous flash of perception, the sleep which lay heavy upon the furniture, the room, the whole surroundings of which I formed but an insignificant part and whose unconsciousness I should very soon return to share. Or, perhaps, while I was asleep I had returned without the least effort to an earlier stage in my life, now for ever outgrown; and had come under the thrall of one of my childish terrors, such as that old terror of my great-uncle’s pulling my curls, which was effectually dispelled on the day — the dawn of a new era to me — on which they were finally cropped from my head. I had forgotten that event during my sleep; I remembered it again immediately I had succeeded in making myself wake up to escape my great-uncle’s fingers; still, as a measure of precaution, I would bury the whole of my head in the pillow before returning to the world of dreams.

Sometimes, too, just as Eve was created from a rib of Adam, so a woman would come into existence while I was sleeping, conceived from some strain in the position of my limbs. Formed by the appetite that I was on the point of gratifying, she it was, I imagined, who offered me that gratification. My body, conscious that its own warmth was permeating hers, would strive to become one with her, and I would awake. The rest of humanity seemed very remote in comparison with this woman whose company I had left but a moment ago: my cheek was still warm with her kiss, my body bent beneath the weight of hers. If, as would sometimes happen, she had the appearance of some woman whom I had known in waking hours, I would abandon myself altogether to the sole quest of her, like people who set out on a journey to see with their own eyes some city that they have always longed to visit, and imagine that they can taste in reality what has charmed their fancy. And then, gradually, the memory of her would dissolve and vanish, until I had forgotten the maiden of my dream.

When a man is asleep, he has in a circle round him the chain of the hours, the sequence of the years, the order of the heavenly host. Instinctively, when he awakes, he looks to these, and in an instant reads off his own position on the earth’s surface and the amount of time that has elapsed during his slumbers; but this ordered procession is apt to grow confused, and to break its ranks. Suppose that, towards morning, after a night of insomnia, sleep descends upon him while he is reading, in quite a different position from that in which he normally goes to sleep, he has only to lift his arm to arrest the sun and turn it back in its course, and, at the moment of waking, he will have no idea of the time, but will conclude that he has just gone to bed. Or suppose that he gets drowsy in some even more abnormal position; sitting in an armchair, say, after dinner: then the world will fall topsy-turvy from its orbit, the magic chair will carry him at full speed through time and space, and when he opens his eyes again he will imagine that he went to sleep months earlier and in some far distant country. But for me it was enough if, in my own bed, my sleep was so heavy as completely to relax my consciousness; for then I lost all sense of the place in which I had gone to sleep, and when I awoke at midnight, not knowing where I was, I could not be sure at first who I was; I had only the most rudimentary sense of existence, such as may lurk and flicker in the depths of an animal’s consciousness; I was more destitute of human qualities than the cave-dweller; but then the memory, not yet of the place in which I was, but of various other places where I had lived, and might now very possibly be, would come like a rope let down from heaven to draw me up out of the abyss of not-being, from which I could never have escaped by myself: in a flash I would traverse and surmount centuries of civilisation, and out of a half-visualised succession of oil-lamps, followed by shirts with turned-down collars, would put together by degrees the component parts of my ego.

Perhaps the immobility of the things that surround us is forced upon them by our conviction that they are themselves, and not anything else, and by the immobility of our conceptions of them. For it always happened that when I awoke like this, and my mind struggled in an unsuccessful attempt to discover where I was, everything would be moving round me through the darkness: things, places, years. My body, still too heavy with sleep to move, would make an effort to construe the form which its tiredness took as an orientation of its various members, so as to induce from that where the wall lay and the furniture stood, to piece together and to give a name to the house in which it must be living. Its memory, the composite memory of its ribs, knees, and shoulder-blades offered it a whole series of rooms in which it had at one time or another slept; while the unseen walls kept changing, adapting themselves to the shape of each successive room that it remembered, whirling madly through the darkness. And even before my brain, lingering in consideration of when things had happened and of what they had looked like, had collected sufficient impressions to enable it to identify the room, it, my body, would recall from each room in succession what the bed was like, where the doors were, how daylight came in at the windows, whether there was a passage outside, what I had had in my mind when I went to sleep, and had found there when I awoke. The stiffened side underneath my body would, for instance, in trying to fix its position, imagine itself to be lying, face to the wall, in a big bed with a canopy; and at once I would say to myself, “Why, I must have gone to sleep after all, and Mamma never came to say good night!” for I was in the country with my grandfather, who died years ago; and my body, the side upon which I was lying, loyally preserving from the past an impression which my mind should never have forgotten, brought back before my eyes the glimmering flame of the night-light in its bowl of Bohemian glass, shaped like an urn and hung by chains from the ceiling, and the chimney-piece of Siena marble in my bedroom at Combray, in my great-aunt’s house, in those far distant days which, at the moment of waking, seemed present without being clearly denned, but would become plainer in a little while when I was properly awake.

[CFSCCorp]

Hahaha.