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Uncertainty meets its match
In brief Despite an upturn in the economic outlook, uncertainty remains ingrained into business operations today. As a result, most corporate treasuries are
Find out moreWhat does Taulia offer to clients using SAP?
Efficiently managing working capital becomes more and more important for corporates in the current challenging economic conditions and disruptions in the supply chain. As a result, the market has seen an increased demand for early payments of receivables from corporates. Managing working capital is essential in maintaining the health or even the survival of the business, especially in difficult economic times. Furthermore, efficient working capital management could benefit the growth of the company.
Working capital management includes the act of improving the cash conversion cycle. The cash conversion cycle expresses the length in days that it takes to convert cash outflow from purchasing supplies into cash inflow from sales. The cash conversion cycle (CCC) is defined as Days Sales (Receivable) Outstanding + Days Inventory Outstanding – Days Payables Outstanding (CCC = DSO + DIO – DPO). Decreasing DSO and DIO and increasing DPO lowers the cash conversion cycle, accelerates cash flow and improves a company’s liquidity position.
What is Supply Chain Finance?
The most popular method to manage working capital efficiently is using Supply Chain Finance (SCF). We distinguish the following SCF solutions:
An SCF program is financed by a third-party funder, which is usually a bank or an investing company. Additionally, SCF is often facilitated by technology to facilitate the selling of the supplier’s receivable in an automated fashion.
Reverse factoring
An example of reverse factoring is an automobile manufacturer that is buying various automobile parts from various suppliers. The automobile manufacturer will use a reverse factoring solution to pay the part suppliers earlier and extend the payment terms with these suppliers. Reverse factoring works best when the buyer has a better credit rating than the seller, as the costs of receiving the payment in advance is based on the credit rating of the buyer (which is higher than the credit rating of the seller), the seller receives funding at a more favorable rate than it would receive in the external capital market. This advantage gives the buyer the opportunity to negotiate better payment terms with the seller (higher DPO), while the seller could receive payments of the sale transaction in advance (lower DSO), decreasing the cash conversion cycle of both parties. Effectively, reverse factoring encourages collaboration between the buyer and the seller and potentially leads to a true win-win between buyers and suppliers. The buyer succeeds in its desire to delay payments, while the seller will be satisfied with advanced payments. However, the win for the supplier depends on how the costs of the program are split between the corporate (buyer) and its supplier. Usually, the costs are borne solely by the supplier. Therefore, the program is only desirable for a supplier if the program costs (interest to pay on the SCF funding based on the buyer’s credit rating and the program fee) is lower than the opportunity costs of the supplier. The opportunity costs are defined as the costs of lending funds against an interest rate which is based on its own credit rating.
Benefits and Risks
The benefits of SCF are the following:
Supply Chain Finance also has risks:
What is Taulia?
Zanders sees a lot of movement in the SCF market. One interesting development is the acquisition of Taulia by SAP. Taulia is a leading supply chain software provider founded in 2009 with over 2 million business users. The rationale behind this acquisition is to expand SAP’s business network further and strengthen the SAP solutions in the financial area. The takeover of Taulia is understandable as more than 80% of the customer base of Taulia runs SAP as their ERP system. Taulia will both be tightly integrated into the SAP software as well as continue to be available as a standalone solution. It will operate as an independent company with its own brand within the SAP Group. Unique in the software business is that Taulia earns a percentage fee of each prepaid invoice that flows through the platform, instead of a fixed fee per transaction or a monthly fee, which is what we usually observe in the market of software vendors. When an invoice is selected for prepayment, the vendor receives a lower amount than the amount of the original invoice. The difference between these amounts is partly compensation for the investor and partly income for Taulia. Taulia offers solutions for all SCF options mentioned earlier: static discounting, dynamic discounting, factoring, and reverse factoring. It is a multi-funder platform on which any and as many banks as desired can be engaged, including the relationship banks of a corporate.
Supply Chain Finance Example
Original situation
In this example, the supplier and Company XYZ have a payment term of 45 days in place. This is the ‘original situation’:
Payment term extension (optional)
Company XYZ starts negotiations with the supplier to extend the payment terms. They agree on a new payment term of 90 days. This step is optional.
Supplier joins SCF program
The supplier joins the SCF program. Due to the SCF program, the supplier benefits from early payment. The interest that the supplier needs to pay is based on the (strong) credit rating of Company XYZ. In other words, the supplier can finance at lower interest rates.
Features of a Supply Chain Finance program
The features of a best practice SCF program such as Taulia are the following:
Accounts Receivable solution
Next to the reversed factoring solution, Taulia offers a solution for accounts receivable (AR) financing, also known as factoring. This solution works slightly differently than the reversed factoring solution as your customers do not need to be onboarded on the platform. AR invoices can be sold to a third-party funder, who pays the face value of the invoice less the proposed discount. The actual AR invoice payment from the buyer at maturity date will be collected in a collection account and send back to the investor.
To conclude
The ultimate goal of an SCF program is to unlock working capital for your company. With the choice for an appropriate SCF solution, and a successful implementation including integration to your ERP, the benefits of an SCF program can be achieved. Taulia could be the appropriate solution for you.
If you would like to know more about Supply Chain Finance and/or SAP Taulia, contact Mart Menger at +31 88 991 02 00.
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