In recent years, the role of corporate treasury has evolved in leaps and bounds. Alongside traditional responsibilities for liquidity management and risk mitigation, the focus has steadily shifted to the strategic integration of financial solutions into the overall corporate structure.

Amid an environment of volatility, characterized by the war in Ukraine and tense interest rate policies in many countries, a new urgency is attached to the issue of supply chain finance (SCF) for corporate treasury. Now more than ever, geopolitical risks and unstable financial markets require companies to secure and financially optimize their supply chains. In this regard, SCF offers valuable tools for minimizing risk and securing liquidity. Having said that, just how do you go about finding the right SCF solution, embedding ESG criteria in it all while avoiding the pitfalls of implementation? This article sheds light on both the challenges and key success factors.

Choosing the right solution

Across a wide range of SCF solutions, choosing the right one can be complex. There are several models of supply chain financing, including non-bank solutions, from approaches that are done directly through a banking partner's platform, to models that are handled through fintech solutions. The range of instruments can also vary widely in terms of their design and function; for example, compare a dynamic discounting solution, where companies use their own cash, with a reverse factoring platform, which is financed by an external third party.

For this reason, it is essential to include the solution in the company's strategic financial planning. As part of the selection process, companies should consider criteria such as scalability, flexibility and the cost-benefit ratio. Picking the right SCF solution begins with an in-depth analysis of the company's own supply chain. Particularly against the backdrop of geopolitical risks, it is imperative to assess supplier stability and geopolitical exposures. On top of this, it is important to review interest rate policies and their impact on financing models. To this end, scenario analysis tools can help in assessing different financing options, taking into account the current market situation and future interest rate increases. Factors such as scalability, flexibility and compatibility with existing systems should also be included.

Sustainable supply chain financing

In recent years, taking ESG criteria into account in supply chain finance has become much more important. It is no longer just about ensuring liquidity along the supply chain, but also about doing so in an ethically and environmentally responsible way. Companies that embed ESG criteria into their SCF strategy reap benefits in several respects. For one thing, they meet increasingly stringent legal requirements and stakeholder expectations, which minimizes the risk of incurring legal sanctions or reputational damage. For another, they offer investors and partners greater transparency on risk management and corporate strategy, which can positively impact company valuations.

However, integrating ESG criteria can also be a complex process. It requires a comprehensive risk assessment that not only takes into account financial factors, but also social and environmental factors. Beyond that, it is important to establish clear KPIs and monitoring systems to ensure compliance with ESG objectives. These KPIs should be in line with overall business objectives and be properly implemented into strategic financial planning.

Strategic integration

For a company's long-term success, integrating supply chain finance into its strategic financial planning is a decisive factor. This goes far beyond mere liquidity management and the optimization of payment terms. Instead, supply chain finance should be approached as an integral part of the overall corporate strategy that can deliver added value in the form of improved working capital, minimized risk and strategic investment opportunities. Companies can not only optimize their liquidity reserves but also reduce their cost of capital and strengthen their negotiating position with suppliers by systematically examining cash flow cycles, supplier relationships and financing conditions. All these aspects should then be included in long-term financial planning so as to create a sustainable and resilient business model. This is the only way that supply chain finance can actually contribute to enhancing a company's financial performance and competitiveness in an increasingly complex economic world.

Pitfalls during implementation

Implementing an SCF solution is rarely a smooth process. One classic mistake relates to its inadequate integration into the operational business. A successful implementation requires different departments, from procurement to sales, to work closely together. In addition, companies should not rely on technology alone, but instead make sure that the selected SCF solution is compatible with existing treasury processes and systems. An additional potential pitfall is a lack of flexibility caused by rigid contract terms or the inability to respond to market changes.

In other words, integrating SCF into existing treasury processes is not only a technical challenge, but also an organizational one. In this case, the task is to embed SCF measures in strategic financial planning and to create an interface to the operational business. During the technical implementation, attention must be paid to integrating the SCF solution into the existing IT landscape to enable real-time monitoring and control of financial flows. When faced with fluctuations caused by interest rate policies and geopolitical risks, a close integration of SCF and treasury processes will prove invaluable in responding to changes in an agile manner.

Worth the time and effort

Supply chain finance is so much more than just a way to increase efficiency within the supply chain. Indeed, it constitutes a strategic tool in today's complex business world that can have a transformative effect on a company's overall financial management. And this is especially true in times of strained geopolitical climates.

The many success drivers for effective implementation and use of supply chain finance are multifaceted. At the top of the list is seamless integration into the company's strategic financial planning. Here, it is not just a matter of bridging short-term liquidity bottlenecks, but rather of optimizing the capital structure and working capital in the long term. Beyond that, full embedding it into the day-to-day operations is crucial. All the different departments, from purchasing and production to sales, must be integrated into the process in order to create synergies and minimize risks..

A further critical aspect is the technical connectivity to the already existing systems such as the treasury management system and the ERP within the company. Through digitalization and automation of supply chain finance, data can be processed in real time, which not only increases transparency, but also improves the speed of response to any problems or opportunities.

These factors all make it abundantly clear that implementing supply chain finance is not a trivial act, but requires in-depth expertise and technological know-how. KPMG's team stands ready to assist you in this process, offering independent advice on how to select and implement your tailor-made SCF solution. Our expertise serves as a link between business acumen and technical processes, enabling the supply chain finance solution to be seamlessly integrated into operational structures and strategic planning. As a result, your supply chain will not only become more efficient, but will also evolve into a true competitive advantage.

Source: KPMG Corporate Treasury News, Edition 136, September 2023
Nils Bothe, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Daniel Lichtenberg, Manager, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG