Season 1, Episode 49

Host: Deepesh Patel (DP), Editor, Trade Finance Global

Featuring:

Christian Hausherr, Chairman, GSCFF and Product Manager Trade Finance / Supply Chain Finance EMEA, Deutsche Bank

Stacey Facter, Senior Vice President – Trade Products, BAFT

Peter Mulroy, Secretary General, FCI

Optimising the Cash Conversion Cycle is the corporate treasurer’s secret sauce. The crucial formula balances and measures out how the cash in a company is converted through inventory and accounts payable, sales and account receivable and then back into cash.

Deepesh Patel (DP): I’m Deepesh Patel, Editor at Trade Finance Global.

Deepesh Patel: I’m Deepesh Patel, Editor at Trade Finance Global.

Optimising the Cash Conversion Cycle is the corporate treasurer’s secret sauce. The crucial formula balances and measures out how the cash in a company is converted through inventory and accounts payable, sales and account receivable and then back into cash.

Why is this important? Well, cash is king, and so is liquidity, both for buyers and sellers. The buyer-led programme, payables finance, is aimed to benefit both buyers and sellers, optimising working capital and the cash conversion cycle, whilst at the same time, providing sellers with alternative, potentially cheaper sources of capital, whilst allowing suppliers to get paid earlier.

The supply chain finance technique of payables finance is regarded by the industry as

a useful and beneficial tool for both buyers and suppliers. Yet recently, it’s come under significant scrutiny by the press, financial Ombudsman, and various regulators around the world. Add to this, the financial distress wrought by the Covid-19 pandemic, with SMEs tending to be the first to feel the effects of financial crises.

TFG’s Deepesh Patel heard from Peter Mulroy, Secretary General of FCI, Stacey Facter, SVP of Trade Products at BAFT, and Christian Hauscher, Chairman of the Global Supply Chain Finance Forum and Product Manager for Trade and SCF EMEA at Deutsche Bank.

The Global Supply Chain Finance Forum (GSCFF) – comprising BAFT (Bankers’ Association for Finance and Trade), FCI, the International Chamber of Commerce (ICC), the International Trade & Forfaiting Association (ITFA) and the Euro Banking Association (EBA) – today released a paper in response to growing concerns regarding the use of supply chain finance (SCF) and, in particular, payables finance programmes. The report, ensuring payables finance remains a force for good, aims to address criticisms across three key areas: the potential adverse impact on suppliers, issues relating to financial reporting and transparency, and overall programme risk.

Christian Hausherr, Chair of the GSCFF, as well as European Product Head of Payables Finance, Trade Finance & Supply Chain Finance at Deutsche Bank, says:

“When used in an appropriate manner, payables finance programmes enable buyers and suppliers to optimise their working capital and strengthen their relationships with each other. However, reports relating to the misuse of payables finance programmes, notably around suppliers being forced into accepting unfavourable terms, are extremely worrying. As such the GSCFF has taken the initiative to address these concerns head-on, to promote understanding of the technique and its use.”

The report addresses topics ranging from the alleged “bullying” of small and medium-sized enterprises (SMEs) to join payables finance programmes, to issues around financial disclosure, to impact of Covid-19 on the use of the technique.

Key conclusions include:

  • SMEs should never be “bullied” to join such programmes. Reports of such practices are highly concerning and taken for the GSCFF. They also ignore the balance that can be achieved through well-structured payables finance programmes, which not only help buyers and therefore assure the health of the overall supply chain, but also provide prompt access to funds for suppliers on an affordable basis, addressing the systemic SME cashflow challenge.
  • Suppliers should feel that there is absolutely no obligation to participate. If they are not in urgent need of cash, they can opt to receive payment in full on the original due date. The report strongly encourages finance providers to follow accepted industry practice in considering extensions of terms.
  • Liabilities rising from SCF programmes do not create additional financial risk above and beyond those that arise from trade between a buyer and a seller. Negative outcomes can be avoided by implementing strong credit analysis of a corporate’s balance sheet before engaging in a SCF programme.
  • Transparency of financial reporting relating to the usage of SCF programmes is desirable but requires developing parameters for disclosure in corporates’ financial statements in coordination with accounting standards bodies.
  • Covid-19 may have resulted in increased use of SCF, yet this does not create increased risk within the system as it would be counter-productive and inappropriate for banks to swiftly withdraw credit lines.

The report follows extensive work from the GSCFF on promoting strong industry standards and agreed definitions, including the release of the Standard Definitions for Techniques of Supply Chain Finance and Payables finance – how it helps global supply chains. In addition, the GSCFF has been working on a series of additional guidance documents for the techniques included in the Standard Definitions. The first report, on receivables discounting, was published in June 2019, with the next on payables finance due this year.

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