From day-to-day business to strategy

The role of Corporate Treasury has evolved massively in recent years. In addition to the traditional responsibility for liquidity management and risk minimisation, the focus has increasingly shifted to the strategic integration of financial solutions into the overall corporate structure.

In a volatile environment characterised by the war in Ukraine and a tense interest rate policy in many countries, the topic of supply chain finance (SCF) has taken on a new urgency for Corporate Treasury. Geopolitical risks and unstable financial markets require companies more than ever to secure and financially optimise their supply chains. SCF offers valuable instruments for minimising risk and securing liquidity. But how do you find the right SCF solution, integrate ESG criteria and avoid stumbling blocks during implementation? This article sheds light on the challenges and significant success factors.

There is a wide range of SCF solutions available and choosing the right one can be complex. There are various models of supply chain financing, including bank-independent solutions, approaches that take place directly via the platform of a banking partner and models that are processed via fintech solutions. The range of instruments can also differ significantly in their design and function, for example when comparing a dynamic discounting solution, where companies use their own cash, with a reverse factoring platform that is financed by an external third party.

It is therefore essential to embed 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. The selection of the right SCF solution begins with an in-depth analysis of the company's own supply chain. Particularly in the context of geopolitical risks, it is essential to assess supplier stability and geopolitical exposures. Interest rate policies and their influence on financing models must also be analysed. Scenario analysis tools can help to evaluate various 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 taken into account.

The consideration of ESG criteria in supply chain finance has become significantly more important in recent years. It is no longer just about ensuring liquidity along the supply chain, but also about doing so in an ethically and environmentally responsible manner. Companies that incorporate ESG criteria into their SCF strategy benefit in several ways. Firstly, they meet increasingly stringent legal requirements and stakeholder expectations, which minimises the risk of legal sanctions or reputational damage. Secondly, they offer investors and partners a more transparent view of risk management and corporate strategy, which can have a positive impact on the company's valuation.

However, the inclusion of ESG criteria can also be complex. It requires a comprehensive risk assessment that takes into account not only financial, but also social and environmental factors. In addition, it is important to establish clear KPIs and monitoring systems to ensure compliance with ESG objectives. These KPIs should be in line with the overall corporate objectives and integrated into strategic financial planning.

The integration of supply chain finance into strategic financial planning is a decisive factor for the long-term success of a company. It goes far beyond mere liquidity management and the optimisation of payment terms. Rather, supply chain finance should be seen as an integral part of the overall corporate strategy, which can offer added value in the form of improved working capital, risk minimisation and strategic investment opportunities. By systematically analysing cash flow cycles, supplier relationships and financing conditions, companies can not only optimise their liquidity reserves, but also reduce their cost of capital and strengthen their negotiating position with suppliers. All of these aspects should be taken into account in long-term financial planning in order to create a sustainable and resilient business model. Only in this way can supply chain finance really help to increase a company's financial performance and competitiveness in an increasingly complex economic world.

The implementation of an SCF solution is rarely a smooth process. A classic mistake is insufficient integration into the operational business. Effective implementation requires close co-operation between different departments, from procurement to sales. Furthermore, you should not rely on technology alone, but ensure that the selected SCF solution is compatible with existing treasury processes and systems. Another stumbling block can be the lack of flexibility caused by rigid contractual terms or the inability to react to market changes.

The integration of SCF into existing treasury processes is not only a technical challenge, but also an organisational one. SCF measures need to be embedded in strategic financial planning and an interface to the operational business needs to be created. During technical implementation, care must be taken to ensure that the SCF solution is integrated into the existing IT landscape in order to enable real-time monitoring and control of financial flows. In times of fluctuations due to interest rate policy and geopolitical risks, a close integration of SCF and treasury processes can help to respond to changes in an agile manner.

Supply chain finance is far more than just an instrument for increasing efficiency within the supply chain. In today's complex business world, it is a strategic tool that can have a transformative effect on a company's overall financial management. This is especially true in times of tense geopolitical conditions.

The success factors for effective implementation and utilisation of supply chain finance are complex. First and foremost is the seamless integration into the company's strategic financial planning. This is not just about bridging short-term liquidity bottlenecks, but rather about the long-term optimisation of the capital structure and working capital. In addition, full integration into the operational business is crucial. The various departments, from purchasing and production to sales, must be integrated into the process in order to create synergies and minimise risks.

Another critical point is the technical connection to existing systems such as the treasury management system and the ERP within the company. By digitising and automating 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.

All these factors make it clear that the implementation of supply chain finance is not a trivial act, but requires in-depth expertise and technological know-how. The KPMG team will be happy to assist you and offer you independent advice on the selection and implementation of a customised SCF solution. Our expertise serves as a link between professionalism and technical processes and enables the supply chain finance solution to be seamlessly integrated into operational structures and strategic planning. This not only makes your supply chain more efficient, but also transforms it into a real competitive advantage.

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