As the payables finance industry expands, Deutsche Bank’s Christian Hausherr explores how it is evolving and adapting to meet changing priorities.
As further signs of worsening economic conditions flash up on her newsfeed, the treasurer of a large car manufacturer begins to worry: how will the prevailing conditions impact her business? And what about the suppliers that support her global supply chain? She knows all too well that unfavourable macroeconomic swings can put small suppliers out of business – potentially bringing her own production line to a sudden halt. Even if these suppliers are able to weather the economic environment, they will continue to face working capital strains – with many having to wait up to 90 days to receive payment. So how can the treasurer bolster her working capital, while simultaneously shoring up points of vulnerability in her supply chain? One popular solution is the implementation or extension of a payables finance programme – a buyer-led supply chain finance technique that enables a company to support its suppliers by granting them early access to liquidity at favourable rates.
Demand for payables finance programmes has continued to grow in recent years, fuelled not only by working capital concerns, but also by the need for greater stability, as supply chains navigate an increasingly volatile economic environment. As an expanded base of anchor buyers, including non-investment-grade companies, move into the market for payables finance, however, the creation and implementation of robust industry standards will be important to ensuring the solution develops sustainably.
First and foremost, payables finance remains a working capital exercise, of course – and there is still plenty of scope for businesses to further optimise their working capital in this way. PwC’s Working Capital Survey 2018/2019, for example, highlights the huge cash opportunity – estimating that global listed companies could release €1.3trn by addressing poor working capital performance. By improving working capital through the use of payables finance, buyers – and their suppliers – can free funds to invest in growth without having to strain cash flows or seek additional financing. Well-known consumer goods giant Procter & Gamble (P&G), for instance, has capitalised on this opportunity – having yielded nearly US$5bn in cash from its supply chain finance programme in the last five years, while simultaneously providing additional support to its suppliers.
Beyond working capital considerations, however, businesses have looked to payables finance as a way to offset the impact of increased economic uncertainty – not only on themselves, but also on their suppliers. As a result, corporates are looking to extend the reach of their programmes in a bid to shore up points of vulnerability in the supply chain – opening the door for smaller suppliers to be onboarded. While existing anchor buyers are reaching further down the chain, new buyers are also looking to get in on the act, with more and more non-investment grade buyers setting up their own payables finance programmes.
The huge potential of integrating sustainability goals into payables programmes is also driving evolution. Many corporates, keen to capitalise on the benefits from both a business and brand perspective, have begun to incentivise sustainable practices in their supply chain – offering favourable rates to suppliers that meet certain criteria and enabling them to monetise their sustainable performances.
Setting the standard
However, negative press coverage about suppliers having no choice but to accept a lower amount if they want to be paid inside 30 days, and concerns about accounting treatment is galvanising the industry to do more to clarify the risks and benefits of these programmes and develop standards that everyone understands.
This was highlighted in January 2018 following the collapse of British construction company Carillion. Variation in accounting standards meant that many of Carillion’s balance-sheet liabilities tied to payables finance were classified as trade payables, despite effectively taking on the character of bank debt. Since then, scrutiny has intensified over how payables finance programmes are audited. Going forward, banks and corporates need to avoid this kind of situation by working together with regulators and auditors to structure programmes in a way that minimises the risks and perception of debt-like features. Ultimately, however, the solution will be found through discussions between the buyer and their accountant, and not the buyer and their banks.
To meet the evolving demands of global supply chains, consistency is needed not just within accounting, but also across the entire industry. The wheels are in motion, in this respect. Almost half a decade ago, in order to work towards this goal, the Global Supply Chain Finance Forum (GSCFF) was set up. Since then, the GSCFF has provided guidance on terminology and KYC standards for key supply chain stakeholders, such as financial institutions, accounting firms, rating agencies and regulators. Most recently, the GSCFF published its “Receivables Discounting Technique” – the first in a series of industry guidance documents intended to provide clarity and consistency to the world of SCF. A similar guidance on Payables Finance is a work in progress and is scheduled for publication in Q1 2020.
For more information on the ever-evolving questions surrounding payables finance, please see Deutsche Bank’s recently released industry guide – Payables Finance, A guide to working capital optimisation
Christian Hausherr is Chair of the GSCFF and European Product Head of Payables Finance, Trade Finance and Supply Chain Finance at Deutsche Bank and is participating on a panel today at BCR's event Supply Chain Finance Summit: APAC in Singapore.