09 June 2016

Optimising your financial supply chain

As your international sales grow, your financial supply chain will become more complex. How can you best manage it?

International Festival for Business 2016

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Companies spend a lot of time and energy on managing their physical supply chain, but managing the chain of cashflow and capital is equally important. Making sure you have strong links between the financial and physical supply chains is vital for making businesses more efficient and less open to risk.

"When we talk about the financial supply chain, we're talking about the interwoven transactions between trading partners, including purchase orders, invoices and paying for goods and services," explains Dean Walker, HSBC's International Trade Director for the Corporate Sector.

"A smooth-running financial supply chain ensures you can make and deliver your products and pay your people."

Optimise working capital

The financial supply chain, if not managed efficiently, can be a major pain point in optimising working capital. Accounts payable constitutes the biggest drain on working capital for most organisations.

In other words, if a business can manage cash well - both its receivables and accounts payable - then one of the benefits can be a reduction in operating costs. Improving processes or freeing cash from balance sheets can also be options available to a company to put their working capital to more productive use.

Bank support

Walker says banks may be able to help companies with efficient working capital arrangements, helping to reduce costs and time spent by companies when making transactions. Trade and receivables solutions can also be reviewed.'

"We're more frequently seeing larger corporates taking advantage of supplier enablement tools, whereby payments can be accelerated to suppliers. This can stretch the creditor period without reducing the financial robustness of the company," explains Walker.

We’re more frequently seeing larger corporates taking advantage of supplier enablement tools, whereby payments can be accelerated to suppliers. This can stretch the creditor period without reducing the financial robustness of the company

Plan ahead

Fundamental, though, to any solution is sound forecasting and budgeting, especially when a business is designing its growth strategy. At its most basic, well-organised cashflow and capital provides the scope for growth.

'This takes the CFO or finance director and the supply chain manager to sit down together with some 'what if' scenarios," advises Walker. "What if your raw material price increases by 10 per cent, for example; what if you've fixed a price with your main customer, but your supplier hasn't made a price commitment to you."

Work together

This crossover between finance and physical supply is, he adds, essential to avoid different parts of the company pulling in opposite directions - a sales force driving a growing order book, for example, and a treasurer with a weather-eye on the need for additional funding to meet increased production and sales commitments.

Walker points to one very clear example of how the two supply chains are interconnected.

"We're seeing a move, especially in textiles, away from Asia and towards Eastern Europe, where companies can still get the cost efficiency. Bangladesh, for example, demands letters of credit six months from the point of production to ensure factory capacity," he says.

"That's a long timescale for a business that may have to react quickly to changing customer demand. A production base closer to home makes it easier to be strategic in purchasing patterns and to take a 'just in time' approach that helps cashflow."

Responsible growth

Bainbridge sees other opportunities to bring together divergent sectors, helping companies working in such arenas as Understanding the impact of growth on the financial supply chain is, as one of Walker's clients puts it, 'responsible growth'. While a business may have the potential to double its turnover, there are ramifications for production, staffing and the relationship with suppliers and buyers.

"The worst-case scenario is that you get disgruntled buyers because you can't deliver, and possibly penalties for late supply," says Walker.

"I can't stress enough how important robust forecasting is. That happens when there's engagement at senior level, when there are shared goals and when a business asks for guidance early on in the process - not only when cashflow crashes."

For further information about trading internationally, visit the HSBC Connections Lounge at the International Festival of Business in Liverpool where an HSBC Trade Specialist will be on hand to answer your questions or call +44 (0)800 78 31 300. Lines are open from 9am -5pm, Monday to Friday and calls are recorded for security and training purposes.

Key takeaways

  1. Strong links between the financial and physical supply chains is vital for making businesses more efficient and less open to risk
  2. Cheaper labour in the Far East may be offset by quicker lead times and better payment terms closer to home
  3. Robust forecasting is essential to ensuring the smooth working of the financial supply chain

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