In the year ahead, companies will be seeking to control costs and manage supply chain risks, as well as furthering their ESG goals. As such, this could be a suitable moment for treasurers to review long-standing supply chain finance programmes and search for opportunities for more flexibility and resilience, says Andrew Burns, SVP EMEA at C2FO.

As 2023 begins, corporate treasury teams are facing no shortage of challenges, from FX and commodity volatility to rising inflation. And with central banks continuing to increase interest rates in the effort to gain control over inflation, it is likely that organisations will look for ways to shore up their cash flows, minimise risk and reduce costs in the year ahead.

In this environment, treasurers need to find ways to de-risk the business, says Andrew Burns, SVP EMEA at C2FO. “It’s vital to have the ability to look around corners and understand the types of black swan events that could potentially come along,” he comments.

Burns argues that supply chain finance (SCF) is one activity that companies should be looking at more closely, given the challenges of the current landscape. “For example, the treasurer of a large chemical company told me that if he looks at everything he’s responsible for in terms of risk, he’s got it covered. But he’s never reviewed the supply chain finance programme – it’s just something that they set up ten years ago and haven’t touched since.”

Broadening the scope of SCF

To address this gap, the strategic treasurer should now be taking a closer look at how their company’s suppliers will be affected by rising inflation, higher interest rates and the prospect of reduced credit capacity – and how the company can support those suppliers more effectively.

“Supply chain finance has been around for a while as a method of supporting the company’s largest suppliers – but what about the rest? Often, there are thousands of suppliers who do not have access to the company’s supply chain finance programme,” notes Burns.

Risk can also arise in a supply chain finance programme in other ways. “What if the bank providing the solution pulls out, or reduces its credit appetite – where does that leave you as an organisation?” Burns observes. “Either you’ve got to pull back the payment terms you’ve negotiated, which will impact your balance sheet – or you keep the risk in the supply chain, with suppliers facing long payment terms without the ability to finance them.”

As such, Burns argues that more flexibility is needed to address the challenges of the coming year. Likewise, with sourcing challenges and supply chain risks likely to continue, he notes that treasurers have a role to play in “helping to mitigate risks around the sustainability of the business as a whole.”

Controlling supply chain costs

At the same time, Burns argues that treasurers may be able to turn to early payment solutions as a means of controlling costs and negotiating more effectively with their suppliers.

“A lot of organisations are already trying to create internal efficiencies in order to reduce their costs,” he notes. “And this year, we’re going to see firms looking at reducing their capital expenditure as one option. But what else can you do? Where do you pass the higher costs that have been passed on through the supply chain?”

While stronger brands may be in a position to pass these higher costs onto customers, this is not a panacea. Burns points out that another option is to explore opportunities across the whole supply chain and try to negotiate better terms: “A very good tool for achieving that is the early payment of suppliers’ invoices, which can be financed as necessary – either through multi-bank funding or with your own cash, depending on your strategic objectives at the time. You can use that as a strategic tool to negotiate with a wider range of suppliers, lock in prices and protect your own P&L, whilst helping suppliers in turn to reduce their own cost of working capital.”

Further goals in 2023

In the coming year, Burns predicts that treasurers will continue focusing on environmental, social and governance (ESG) opportunities, while also seeking to improve their cash flow forecasting processes and manage risk more effectively:

• ESG. Companies are keen to focus on ESG, while also ensuring that they are able to source the materials and products they need. Until recently, treasurers have primarily focused on solutions for their Scope 1 and Scope 2 emissions, which tends to mean mitigating carbon output through financial products like green bonds. But in the year ahead, many will be turning their attention to Scope 3 emissions – in other words, the emissions associated with the company’s value chain.“This means thinking about how you can motivate suppliers to look at their practices and change them,” says Burns. “But how can you do that when they have so many other things they are concerned about? It comes down to supporting suppliers any way you can, including with financial tools.” He adds that many organisations are now focusing on the social element of ESG, for example by putting processes in place to support women-owned businesses and minority-owned businesses.
• Cash flow forecasting. Forecasting cash flows accurately is particularly important in challenging markets, and Burns highlights the importance of understanding the impact of the economic environment on future cash flows. “It’s about being able to see where the organisation could be impacted in the future – is there a customer that is struggling and is not going to pay their dues? Or do we need to accelerate payment to some of our suppliers because they are struggling?”
• Risk management. Burns recalls that during the 2008 financial crisis there was much talk about the importance of the treasurer’s role in the organisation – and in today’s market, the heightened focus on managing risk effectively means that the status of the treasurer is once again rising in importance. “People at the executive level recognise that the treasurer is extremely important in protecting against these risks and safeguarding the continuity of the business,” he notes.

Embracing digitalisation and innovation

Technology has long been a key facilitator for treasury teams. In 2023, being able to gather information, analyse it effectively and determine the best course of action is more vital than ever – and technology has a central role to play in making this possible.

“Reactivity and flexibility are going to be critical to survive these difficult times,” comments Burns. “And that means not being backed into a corner with a solution that looks great now but puts you in a hole in a year or two because it’s not flexible enough.” He adds that the rise of APIs and better connectivity are making it easier for treasurers to look at combining best-of-breed solutions that provide excellence in a specific area.

In the year ahead, says Burns, treasurers need to harness innovation so that they can react to the challenges brought by the economic environment. “If you stick with the current tools, it’s going to be difficult to get through,” he says. “If you look at cost cutting and cash flow generation, most of the options available have already been exhausted. So how can you become more innovative and find different opportunities to control costs and generate cash flow?”

Expanding the scope of supply chain finance

While traditional supply chain finance solutions have enabled companies to generate cash flows that can be used to fund innovation or pay down debts, Burns argues that such solutions don’t allow any room to expand, because these programmes are typically limited to the company’s largest suppliers. C2FO’s solution, he explains, enables suppliers to access liquidity quickly and easily and at a reasonable cost of funding – and it can be accessed not only by the larger suppliers typically covered by supply chain finance, but by all of a company’s suppliers.

In addition, C2FO’s platform is supported by a variety of funding providers. As Burns points out, “If a programme relies on one bank, and that bank pulls out of the relevant region or business, the customer is left exposed and scrambling to find an alternative. Our platform provides multiple funders, so if one pulls out, there is credit capacity elsewhere with no disruption.” Companies can use the platform to lock in costs with their suppliers – and on another note, they can also use the platform as a means of incentivising suppliers to meet their ESG requirements.

“Treasurers need flexible tools in today’s environment that enable them to mitigate their supply chain risks, and the upcoming challenges that could arise if suppliers are unable to access liquidity,” Burns concludes. “In light of these challenges, a lot of companies are now reviewing their existing supply chain finance programmes, and are looking for more flexible tools.”