Smooth sailing through challenging times – with optimized working capital

“Managing working capital has become a higher priority for treasurers across all industries as companies are aiming to shorten their cash conversion cycles to see better returns on the capital invested, also as a result of rising interest rates,” Dirk Fehring, Senior Director Supply Chain Finance at RBI, states. “Interruptions due to the COVID pandemic, geopolitical conflicts or extreme weather events have raised awareness to even better manage the risks inherent in global supply chains,” he adds. Thus, treasurers are looking for financing and risk mitigation techniques to implement strategies to optimize the management of their working capital and liquidity invested in the physical supply chain. 

“Supply Chain Financing solutions are an alternative financing source and are often less expensive than traditional long- and short-term loans, typically the key source for funding,” Sebastian Kupka, Director Supply Chain Finance at RBI, explains. “When it comes to risk mitigation, traditional trade finance instruments including letters of credits, documentary collections and guarantees are often used when parties don’t have a long-term business relation or higher risk profiles,” he states. “The Supply Chain Finance product suite provides more options to the customer as they can choose between traditional trade instruments and Supply Chain Financing depending on the region, the globalization of supply and the number of suppliers & customers. Also Supply Chain Financing solutions and commercial credit insurance (to mitigate counterparty risk of non-payment) often go along, especially in receivables financing.”

Mastering the working capital challenge requires a holistic approach by corporates. Improving accounts payable, accounts receivable and inventory management processes can free up working capital. Treasurers and finance departments should also look at how to free up cash that would be trapped on their balance sheet and how to support resilience of the global supply chain. 

With a flexible Receivables Financing Solution sellers benefit from

• improved working capital and working capital KPIs
• better cash flow and more predictable liquidity planning
• Reduction of assets leads to shorter balance sheet
• Shift of debtor default risk to a third party
• lower costs when compared to traditional lending products
• Potential to grant longer payment terms to customers

With a reliable Payables Financing Solution (such as Reverse Factoring) buyers can

• stabilize their supply chain and reduce the likelihood of future supply chain disruptions, e.g. by ensuring that important suppliers do not fail due to liquidity constraints
• strengthen the supplier relationship by increasing the suppliers’ satisfaction due to early payment and better funding costs
• extend their payment terms and thus improve their working capital and working capital KPIs
• introduce digital platforms that provide for higher process automatization, resulting in potential cost savings and satisfaction on the supplier’s side (e.g. transparency if and when the invoice will be paid)
• utilize cash discounts or rebates offered by suppliers 
  

While Receivables Financing Solutions have been well established around the world for centuries and are utilized by companies of all sizes, Payables Financing Solutions have emerged over the past 25 years mainly for international corporates. “New products integrating for instance payment institutes or post maturity financing address obstacles like the involvement and onboarding of suppliers and now make Payables Financing Solutions also suitable for medium size clients looking to optimize their working capital,” Sebastian Kupka asserts. “We also see the evolvement of analytics-driven solutions, deep-tier financing and embedding ESG,“ adds Dirk Fehring.

“The Implementation of Supply Chain Financing products require time and effort on all sides and are therefore not changed on a regular basis. Choosing the right partner for a long-term cooperation is essential,” Dirk Fehring points out. Aspects like focus on global or regional reach, financial aims and needs should be considered. Finding a reliable partner with respective knowledge is important. “On the technical side, digital tools and online platforms for straight-through processing and integrating financial & non-financial solutions need to be developed - also to further reduce the risk of fraud and errors in open account financing. Banks like RBI are partnering with FinTechs to improve customer experience and to develop innovative products addressing market and our clients’ needs.”