Fighting in Ukraine drives adoption of factoring and digitization.
To combat the myriad of supply chain issues created by the Covid-19 pandemic, as well as new ones that emerged in March as a result of the war in Ukraine and ensuing sanctions, CFOs are focusing on risk mitigation strategies and optimization of working capital. . They build budgets around business drivers rather than historical costs and smooth cash flow by joining digital ecosystems that connect the entire financial supply chain through automated payments.
As Craig Bailey, managing partner at global consultancy The Hackett Group, explains, supply chain backlogs have caused many companies to double their inventory orders.
“Companies are spending more than usual to replenish inventory. Some even use expensive air freight options for emergency inventory orders, knowing that they also have goods stuck at sea,” he says.
Typically, any time organizations react this quickly to supply chain shortages, it leads to a buildup of inventory, Bailey adds. “Most companies are still trying to catch up from 2021.”
Restarting production that was halted by the Covid-19 pandemic in 2020 – particularly in China – resulted in a bottleneck throughout 2021 as shipping rates soared, as did the number of ships waiting to unload their cargo. As of mid-December 2021, no less than 101 container ships were waiting to dock at the Port of Los Angeles and the Port of Long Beach.
Meanwhile, the aftermath of Brexit has complicated UK and EU trading environments by introducing new red tape and increasing border controls for imports and exports.
This was in play before Russia invaded neighboring Ukraine on February 24. The ensuing sanctions and trade restrictions imposed on Russia by much of the rest of the world have increased the complexity of trade.
Interos, a company providing supply chain risk management solutions, estimates that more than 2,100 US-based companies and 1,200 European companies have at least one direct supplier (Tier 1) in Russia, while more than 450 companies in the United States and 200 in Europe have Tier 1 suppliers in Ukraine. The addition of Tier 2 suppliers – those who buy from companies with suppliers in the affected countries – of course increases the number of companies affected. More than 15,100 companies in the United States and 8,200 European companies have Tier 2 suppliers based in Ukraine, and Interos research found that more than 190,000 companies in the United States and 109,000 companies in Europe have Russian or Ukrainian suppliers at level 3.
It remains to be seen whether other sources of supply can be found for Russian and Ukrainian products such as wheat, corn, minerals and oil, above all. Grain importers in Africa and the Middle East are in trouble if supplies of Russian wheat stop reaching their shores. At the same time, interference with shipping in the Black Sea will have far-reaching consequences for global supply chains. At the start of March, around 200 cargo ships were reportedly stuck in Ukrainian ports while others are stranded around the world without access to the Black Sea route to market, already adding to soaring shipping costs. shipment.
According to January data from shipping rate provider Xeneta, Asia-US contract rates had risen 122% since the start of 2020. The Shanghai Container Freight Index, which reflects spot rates from the Shanghai’s export container shipping market, also hit a new high at the end of December 2021. , up 76% year on year, breaking through the 5,000 level for the first time. By mid-March this year, the index had reached 4,625 points.
Manage risks
Reduced access to suppliers and rising shipping costs have hit the bottom line of many companies hard, and CFOs are increasingly turning to factoring their receivables or selling their accounts receivable to smooth their cash flow and reduce risk.
The recent crises in Ukraine have fueled demand for factoring, with companies seeking working capital financing facilities in sectors most exposed to commodity prices, according to Johannes Wehrmann, managing director of corporate sales at Demica, supplier of London-based supply chain finance platforms. .
“Companies are looking to manage their cash more efficiently, paying off higher debt by selling receivables on more favorable terms,” he says. “In Europe, for example, companies are taking advantage of the fact that various large, reputable finance providers are actively trying to grow their factoring business by offering very competitive terms. They are fairly low risk compared to other debt products and allow sellers to repay old debt facilities in place.
For CFOs to know if factoring is a good option for managing their company’s cash flow, they need to have a thorough understanding of their receivables portfolio, adds Wehrmann. “They need to know the value drivers of their portfolios, their historical performance and contract structure. Then they need to think about the impact on their balance sheet, liquidity and profitability. »
According to Tom Seegmiller, vice president of financial planning and analysis at financial management software provider Vena Solutions, deep insights into the drivers of profitability are critical when costs rise.
Finance managers, as well as financial planning and analysis professionals, are increasingly using driver-based budgeting to tie resource usage, activities, and costs to the bottom line.
“Driver-based budgeting, from my perspective, really recognizes that the budget is your bottom line, the articulation of a series of operational elements or activities that take place within the business,” says Seegmiller.
Such an approach shifts the focus from the line item to the activities the company will undertake in the future, he adds. “That’s how you manage the budget. This shifts ownership of the budget from finance, one of the critiques of traditional budgeting, to one that very clearly resides within the business.
In an environment of rising costs, traditional budgeting is insufficient. “In the current environment of uncertainty over input prices, payroll growth and the impact of the Ukraine crisis on the global supply chain, it is even more important for finance leaders to dive deep into the operational side of the business to manage costs,” says Seegmiller.
Go digital
To create more stable vendor relationships while reducing risk, businesses are rapidly joining “digital payments ecosystems,” according to Gavin Cicchinelli, chief operating officer at working capital and business-to-business payment platform provider PrimeRevenue. .
No matter where businesses are today, supply chain issues remain prevalent. One of the biggest challenges for businesses is ensuring they have enough cash flow to produce the products, ship the products, and then keep track of everything.
“About 40-50% of companies still rely on manual supplier management and payment processes in their supply chains,” says Cicchinelli. “Over the past year, PrimeRevenue has focused on delivering enhanced platform solutions that solve these problems for our customers by automating accounts payable and working capital solutions. As a result, businesses can pay their suppliers early or on time when the invoice is due and reduce friction across their entire supply chain, whether they have 100 suppliers or 15,000 suppliers.
He adds that automating the process saves time and money from an accounts payable perspective and smooths and accelerates supplier cash flow.
