No. 3 2011 Edition
Supply Chain Financing Enhances
As corporations strive to recover from the financial crisis and identify new liquidity sources, many are finding success with financial supply chain initiatives.
Trade payables are a major component of the balance sheet, so stretching out payables terms can have a meaningful impact on working capital. As such, treasury departments need to not only manage cash already in their accounts, but also take an active role in managing the impact that payment terms can have on liquidity.
This task can be difficult, however, because while treasury typically manages working capital, the procurement department often manages payment terms. Without effective communication between these groups, it's difficult to have clear cash visibility, or influence the generators or users of working capital.
For example, typical sales terms used to be 30 days, but in order to retain business in a competitive environment, many organizations have extended their customers' payment terms to 90 days. This creates an imbalance if procurement still pays vendors on 30-day terms. Corporations in this situation are financing a 60-day cash-flow gap, which could result in a massive unbalancing of the balance sheet.
A financial supply chain initiative can restore the balance and provide access to additional liquidity by extending payables terms on the supply side. Simultaneously, corporations can help to ensure the health and stability of their suppliers by providing them with access to a low-cost source of funding offered by a third party like Deutsche Bank to reduce their suppliers' days sales outstanding and cost of financing.
Corporations interested in pursuing financial supply chain initiatives should follow these steps:
Next, as corporations sort through what they want from their financing provider, they should consider any geographic limitations.
Many banks offer supply chain financing, but they may just offer pieces of a solution or only be a regional provider. Without people on the ground in the countries where you conduct business, a provider won't know the local customs to support your foreign suppliers or whether local regulations prevent or make it impractical for you to even offer financing.
Because trade is global, financial supply chain initiatives must be global, too.
Deutsche Bank is an innovative provider with feet on the ground in 72 countries. Our consultative advisory services will bring your business up and over the steep learning curve to pick the right financing solution for your needs. Contact your Global Transaction Banking representative to learn more.Next Generation Technology Tools Promote Treasury Efficiencies
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