The current economic climate is compelling companies to manage liquidity better and strengthen their balance sheet.
This has increased the challenge for businesses to remain financially sustainable.
According to PwC's recent Global Working Capital Study 2018/2019, RM6.0 trillion (€1.3 trillion) of cash opportunity could be released by addressing poor working capital management practices. Our analysis for Malaysian businesses indicates an opportunity worth RM110 billion.
Supply Chain Finance (SCF) can be a solution for companies looking at improving their working capital and cash flow position.
SCF provides efficient financing of the value chain, where both parties (Buyer and Seller) can reduce the working capital and improve cash flow at a reduced cost by utilising the buyer’s credit rating.
It provides short-term credit, which can optimise cash flow by allowing buyers to lengthen their payment terms whilst providing suppliers with the option to receive payments earlier.
SCF requires the involvement of an SCF platform and an external finance provider, who pays supplier invoices in advance of the payment due date, for a lower financing cost than the suppliers’ own source of funds. The benefit is then shared amongst the parties.
SCF offers a rare “win-win” scenario for all. If implemented properly, the entire supply chain - buyers, suppliers, and financial intermediaries will stand to benefit from SCF.
Buyers benefit from extended payment terms (aligned to local regulations) and hence, reducing working capital requirements. Suppliers in turn, benefit from having access to accelerated cash flow at preferential interest rates which allows them to receive payment for approved invoices earlier and at a lower cost.
The following diagram summarises the key advantages of utilising SCF for the parties involved:
The “SCF Barometer 2018/2019”, our joint survey* with Supply Chain Finance Community, explores the various benefits of implementing an SCF programme, considering the expectations of parties from both sides of the aisle i.e. Buyer and Supplier.
*More than 80 respondents representing a variety of functions and industries of various sizes. 50% of the respondents are running an SCF programme.
Interestingly, working capital optimisation was viewed as the most important benefit for both Buyer and Supplier, achieved via a reduction in Net Operating Working Capital investment and the shortening of the Cash Conversion Cycle. On top of optimising working capital, an SCF programme also improves the Buyer-Supplier relationship.
Based on our experience, an SCF programme should be part of an integrated Procure to Pay (P2P) strategy. Adopting this approach ensures organisations are equipped with a strong foundation that will help maximise the potential of their working capital.
Together with industry experts, we can work with you to design, implement and deliver successful SCF programmes. We possess the capabilities to assist you in designing an SCF solution and a successful rollout - from understanding the market and helping to develop the business case, to supporting the SCF provider selection and looking at end-to-end cash-flow improvement. More importantly, we're an independent advisor and look at SCF in the context of a wider working capital assessment.
The diagram below illustrates the different stages of the SCF implementation process we can help you with:
Implementing a new SCF programme is challenging. More so with the various needs of the parties involved. If the implementation doesn’t go well, immediate repercussions will be costly. In the longer term, it may affect the integrity and stability of your supply chain. Talk to us. Find out how we can help.