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With the potential new growth opportunities on offer in the developing world, particularly Asia, UK corporates are focusing on taking advantage of growing their businesses in these faster-growing markets. However, with new markets comes the increased need to ensure that complex processes are kept to a minimum. RBS Executive Director and Head of The Trade and Supply Chain Finance Advisory for the UK and EMEA, Anil Walia, and RBS Head of Corporate and Institutional Banking Sales, Brian Turpin, discuss how streamlining trade processes and Supply Chain Finance can help.

It is nothing new that Western companies are looking further afield to drive new growth opportunities, given the low GDP predictions for their home markets. Moreover, increased competitive pressures are forcing the pace of international trade to step up a gear. And if these factors weren’t enough, production of goods and services is constantly being moved to new lower-cost countries.

In order to reduce the complexity involved when operating in overseas markets, an increasing number of firms are focussing their efforts on simplifying and consolidating their production processes. In today’s business climate, companies that do business internationally must be more flexible, especially when it comes to exploring alternative routes for streamlining their processes and cutting costs. Transparency and control over cash flow and financial information is becoming more important than ever before in this more integrated global market-place which UK companies now find themselves in.

A changing world

As UK companies have expanded their geographies, so the remit of the corporate treasurer has grown beyond their traditional areas of focus such as cash and liquidity management. Anil Walia says: “Historically, cash management and trade finance have generally been treated as two separate functions by corporations and, indeed, by banks.” By having a good understanding of their company’s cash flows, corporate treasuries can identify the benefits available across the entire supply chain and better predict impacts on the company’s financial outlook and balance sheet.

Because corporates are purchasers as well as sellers, they’re seeking a closer integration between trade and cash management areas. For many smaller companies (through necessity), these activities are already inter-linked. However, in larger corporates, taking a more holistic approach to reducing the complexity of doing business is not as easily implemented. Each department may have a set of performance criteria that may cause divergent behaviour. A classical situation arises between the purchasing department and the treasury – performance criteria for the former are usually based on gross profit and for the latter on net profit. Small improvements in the order-to-pay process that result in releasing and deploying trapped liquidity can have significant positive long-term effects. These include improvements in business processes, technological developments and integration with banks and other parties.

Optimising the financial supply chain

“In order to benefit from an integrated approach to working capital management it is essential companies view their trading partners as “partners” rather than adversaries. Processes have to be assessed from the perspective of the whole supply chain where all buyers and sellers act as partners” says Brian Turpin. Integrated cash and trade processes can enable trading partners to identify mutually beneficial solutions to common problems – for example, maintaining stability in the supply chain amidst the global financial crisis and its impact on international trade practices.

The science and logistics of moving goods is incorporated in the physical supply chain. In comparison, the financial supply chain (FSC) deals with the movement of funds. As goods move in one direction, the associated funds move in the opposite direction. The process of optimising the FSC combines the challenges of trade finance and cash management, including the optimisation of the order-to-cash cycle for vendors and the procure-to-pay cycle for buyers.

The FSC consists of building blocks that can be integrated seamlessly with supply chain systems to provide more efficient working capital management. So:

• Agreement on management systems enables the buyer and/or seller to enter and agree online on the contractual terms of a transaction
• Order management systems allow the creation of rules for the creation and processing of the purchase order
• Invoice management systems connect buyer, the seller and, if necessary, the bank, and allow for reconciliation and reporting on the status of the invoice payment processes

“Where desired, these systems may be integrated or interfaced with the bank’s financing systems to create end-to-end automated structures that provide the financing [and risk mitigation] to the appropriate counterparty at the most appropriate time during the life time of each individual trading transaction”, added Anil Walia. Thus the demands of buyers seeking to extend their payment terms and sellers wanting to speed up their receivables process may be fulfilled simultaneously.

This benefit can be provided at a fraction of the cost involved in the standard early payment discount methodology that is often applied in business. Take, for instance a situation where the buyer receives a 2% early payment discount on the invoice amount if he opts to pay the invoice 30 days in advance. The cost to the seller for receiving his funds 30 days in advance is 2% flat – this is equivalent to 24% per annum. Why would anyone want to pay that type of interest rate? By utilizing financial supply chain techniques, a bank could provide the financing at 3%-4% per annum to the supplier while the buyer would still be able to retain his extended payment terms. In fact, the buyer could extend his payment terms even further, while the supplier would have zero payment risk against the buyer. Setting up such a program is easier than some may imagine.

A seamless approach

Every trade transaction ends in a payment. Therein lies the simple logic to strive for integrating a company’s trade finance and cash processes. While trade finance focuses on risk mitigation (will I get my payment?), cash management aims at making funds available at the right time at the right place (when will I get my payment?). Any modern Enterprise Resource Planning (ERP) system has the basic modules required for integrating the relative processes internally within a company. The challenge is to find a bank partner who can interface with the company’s processes, and efficiently create a bridge to the processes / systems of the trading partners. The bank involved must have the technical, geographical and legal capability to work with each buying entity and each seller. A good bank should be able to do this with minimum disruption to the processes of the various counterparties involved.

The increasingly international and complex climate many UK businesses are finding themselves operating in has led to many corporations bringing together the treasury and procurement departments to explore process re-engineering to improve transparency, increase efficiency through straight-through-processing (STP) and enhance cash application for a positive impact on working capital - and a company’s financial statements. And, unlike many of the ambitious treasury projects which emerged over the past decade, many of the solutions today are appropriately cost-effective.

Supply Chain Finance at RBS

At RBS our supply chain finance capabilities are differentiated and deep-rooted. We have the experience to understand your needs and the financial strength to meet them. The industry has acknowledged our expertise, the quality of our solutions and the competitive edge our technology provides through several awards over the past years. Our supply chain finance solutions provide transparency, with information available at your fingertip through our web-based technology. We deliver these solutions through a team of supply chain finance specialists and a dedicated operations unit.