The challenge:
METRO Cash & Carry India operates 16 stores across the country with its footprint extending well beyond the major metropolitan areas such as Mumbai and Bangalore.
In India, cash and cheques remain the predominant payment means; cheques constitute 10% by volume. Therefore, operating across a country of such geographical breadth makes the collection of cheques quite a challenge, especially in remote locations. Cheque transit times can vary from two to five days, depending on the cheque pick-up and clearing location.
Rajshekhar Rao, Head Finance and Accounts at METRO India explains the key objective for the company. “In addition to improving the collections process, we wanted to strengthen our supply chain through supplier financing programmes.”
METRO’s objectives for its cash management and supply chain financing were as follows:
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Improve efficiency of the collections process.
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Reduce DSO, and improve DPO.
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Improve working capital or cash flow.
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Achieve greater control and reduce risks on cheque returns.
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Reinforce supplier relations and streamline the payments process.
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Ability to negotiate cash discounts from suppliers.
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Establish a robust supplier finance programme with simplified documentation.
The solution:
The solution uses cheque truncation technology to process cheques through image-based clearing. The cheques are scanned at the collection locations and the images are routed through Reserve Bank of India’s Cheque Truncation System and Speed Clearing System to expedite the clearing process. The imaging technology allows the cheque presentation cut-off time to be extended to 7:00pm (instead of the usual cut-off time of 12:00pm) and provides credit the next day.
The supplier financing programme that METRO India structured via RBS is a streamlined programme with simplified documentation. When METRO India accepts the invoices raised by its suppliers, the company will inform RBS about the acceptance, and provide the list of suppliers and their account details.
METRO India will also authorise RBS to debit the principal amount from its account on the due date. Based on this request, RBS will discount the bills and remit the proceeds to the suppliers on the day of the request. On the date of bill maturity, the principal amount is debited from METRO India’s account.
Best practice and innovation:
In the highly margin-sensitive wholesale trade segment in which METRO India operates, this programme has enabled METRO India to generate additional margins and at the same time solve the cash flow problems of its key suppliers, as well as ensuring additional income of around €0.75m.
METRO India’s integrated working capital strategy addressed multiple challenges across the financial supply chain. As an early adopter of new technology offered by RBS’s Remote Cheque Scanning (RCS) solution, METRO India saved an average of three days on the cheque processing time. The foresight to leverage technology has enabled METRO India to significantly improve the collections process even at remote locations across India. Using the solution METRO India has improved realisation timelines, minimised cost of collection and achieved additional controls. The company also benefitted from extended cut-off times for the presentation of cheques and faster realisation of cash. This improved liquidity and cash flow, enabling the business’s operations to run smoothly.
“The holistic approach that we have adopted provided significant benefits across the supply chain,” says Rao. “The solutions helped us to reduce our days’ sales outstanding (DSO) and extend our days’ payables outstanding (DPO). This has improved our cash flows and reduced our overall borrowing requirements.”
