The minimum requirements introduced by the Basel III framework and the prolonged negative short-term interest rates environment have led banks to charge for demand deposits and deposits with residual maturities of less than three months.
Money market funds and even secured structured products have also been losing money for a while. Hence corporate treasurers have been forced to accept burning cash to preserve their liquid investments.
Fortunately, no storm lasts forever, but before the situation improves, our wisest advice is to escape this cash dilemma and pave for the future by investing into the supply chain where myriad benefits are within reach.
Working hand-in-hand with treasurers and CFOs to innovatively optimize their financing strategy, liquidity, payments and treasury efficiency, we observe four promising trends in supply chain optimization.
Due to the ongoing supply chain disruptions, cash-rich clients have decided to rebuild their inventories. It is the quickest way to invest cash and avoid the cost of cash balances. Although conceptually simple, it requires a strong understanding of the activity and detailed classification of different inventory categories.
Supporting your suppliers through earlier payments in exchange for discounts brings many benefits for the buyers:
- Attractive risk-free returns. Buyers are effectively investing their own cash in order to capture discounts, which translate into risk-free returns.
- Immediate reduction of the cost of goods and services purchased, which can support procurement KPIs.
- Enhanced supply chain resilience and reduced likelihood of any disruptions.
Conversely, benefits for suppliers include:
- Reduction in days sales outstanding (DSO) and thereby cash conversion cycle improvement.
- Access to external funding, often at a lower cost than other options available, enabling better management of unexpected costs or investment in growth and innovation.
- Choices in financing a single invoice, several, or all of them.
On the implementation side, resorting to digital solutions/platforms can be extremely helpful to avoid the operational burden arising from the management of dynamic discounting programs.
Supplier short-term funding
Should you want to further strengthen your supply chain, another option is to provide your suppliers with direct financing. In such cases, we would highly recommend implementing a counterparty risk assessment framework to avoid adding any risks to your liquidity investment.
Close to 80% of retail and consumer staples companies’ carbon footprints come from the supply chain. To tackle global warming, suppliers will have to be involved in the company’s CO2 reduction effort.
One way is to associate them with the reduced funding costs you can extract from your banks and investors. Our experience has shown that most ESG or sustainability-linked financing instruments today can help you reduce your funding costs by 5bps to 10bps.
We foresee the rise of supplier financing programs, where suppliers are no longer tiered according to their size or strategic importance, but instead based on their ESG rating or commitment. This is an efficient way to foster the alignment between your suppliers and your own ESG strategy.
Time for action
We assist our clients at various stages to ensure that their projects make a real impact. Together, we build a solid cash forecasting and working capital monitoring framework to identify the optimum available liquidity to invest.
Highlight: Forecasted returns that can be achieved through the above options range from 2% to 12% of the investment, via increased EBITDA and lower cost of funds, i.e., way higher than any secured liquidity investments.
We estimate the potential benefits of supply chain investment to build a business case and support the change management. We support the selection of the relevant digital/platform providers and, when required, we assess counterparty risk profiles, or review counterparty risk policy/process. Ultimately, we implement the above and transfer ownership/expertise to our clients.