Insight & Analysis

A perfect match: CSR meets WCM

Published: Sep 2019

How can a Corporate Social Responsibility (CSR) programme be effectively incorporated into essential working capital management activities? Treasury Today consults an expert.

The growing pressure from consumers for environmental and social responsibility has made businesses prioritise their Corporate Social Responsibility (CSR) programmes. Key success factors for management, board and shareholders now include managing their business in an ethical and sustainable manner. Ethical approaches are recognised as helping to build customer loyalty and shareholder value; hence they have both a moral and material value to businesses.

Working Capital Management (WCM) remains fundamental for all companies regardless of size, sector or their position within a supply chain. Optimising working capital is key to ensuring long-term growth and profitability. For the treasury functions in major companies, it is the use of different techniques and policies to manage their cash conversion cycle that has often taken precedence in their planning.

The way companies manage working capital depends on several factors including their industry, position in the supply chain (as either a manufacturer, buyer or seller) and their relationship in the overall trade cycle. Effective and efficient working capital management ensures liquidity is maintained for the future and facilitates a company’s ability to prosper and grow.

However, at times, WCM and CSR can seem at odds with each other, notes Brendan McLoone, Senior Associate at Trade Advisory Network, a firm specialising in the strategic development of global supply chain, trade and invoice finance.

“Corporates with key working capital metrics to manage have in the past been keen to exert payment extensions on their suppliers while also pushing down the cost of goods,” he says. “This has an impact on their suppliers’ working capital position, and effects the sustainability of their supply chain.”

Model behaviour

However, in managing working capital, McLoone says a corporate can also be a good guardian of its supply chain. It may do so by utilising the following governance metrics within its CSR objectives.

Prompt payment. Settle 95% of undisputed invoices on time and within agreed contract terms. Governments encourage larger companies to pay their smaller suppliers promptly. The UK government, for example, requires any supplier tendering for a government contract worth more than £5m per annum to answer questions about its payment performance.

If a business doesn’t pay 95% of its invoices within 60 days for non-government contracts, it runs the risk of being excluded from the tendering process. This is in addition to UK government legislation which dictates that all tier 1 suppliers working on public bodies contracts should also be paying their tier 2 suppliers within 30 days.

SME payment terms. Creating a level playing field for SME suppliers who are often penalised with extended payments terms compared to their larger counterparts. SME suppliers should be offered the more favourable payment terms or at least parity with the payment terms that are generally reserved for larger suppliers.

Payment term consistency. There are often a wide range of different payment terms and early settlement discounts for the same supplier across a corporate’s buying functions. Large corporates should analyse their payment terms to ensure they are compatible with their working capital and CSR agenda. For a sustainable supply chain, they should also standardise their payment terms to help stabilise their working capital position and support suppliers.

Financing the supply chain. Many major corporates have in place with their financial providers programmes that use their credit standing to offer qualified suppliers’ earlier settlement at a discount. The discount reflects the corporate’s credit standing rather than the supplier’s existing cost of funds. Such programmes have often been used to facilitate an extension in payment terms with suppliers. A key component for the treasurer is that they are constructed in a way that does not increase bank debt.

This of course is something that has to be agreed by the company’s auditors. These payable finance programmes have also been successfully used to provide working capital finance to suppliers in countries where they do not have the means to arrange their own financing solutions. Properly designed, these payables finance programmes can contribute and support the company’s CSR objectives.

Perfect combination

“I believe that these options can work in a variety of ways together, combining CSR objectives with the optimisation of working capital,” comments McLoone. For corporates that already have payables finance programmes in place, the opportunity to conduct a ‘health check’ may lead to the introduction of more flexible alternatives that better suit their evolving objectives.

“For large companies contemplating a payables finance programme, there are many alternatives than just relying on one of their panel banks,” he adds. “Careful consideration should be given to the different options that can address both their working capital and CSR goals.”

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