The Treasurer’s Guide to Trade Finance

The Role of Trade Finance in Working Capital

Purchase to pay

On the supply side, the risks are reversed.
The supplier will want to manage the risk
that its customer will not pay the agreed
amount on the agreed date. The customer,
though, will want to ensure the right goods
are delivered at the right time (performance
risk), otherwise this would represent a
risk to its own operations. For the efficient
operation of the supply chain it is important
that the customer maintains good working
relationships with its suppliers. Many supplier
relationships are considered to be strategic
partnerships. In reality this means supply
chains compete with each other.
These represent two parts of the three-
part working capital cycle. The order to cash
process takes a company from the process
of accepting an order to receiving payment,
via billing/invoicing, collection and accounts
receivable, to bank reconciliation. The
purchase to pay process takes the company
through the process of identifying and
paying for inputs necessary to produce the
company’s outputs.

Order to delivery

The third element of the working capital cycle
is the order to delivery process. This takes the
company through the process of designing,
producing and delivering its products. There
are not the same external risks during this
stage. Nevertheless, the treasurer will need to
work to ensure sufficient finance is available to
fund this process.

The working capital cycle

In the past, the treasurer would participate

only at the ends of the order to cash and

purchase to pay processes. In the order

to cash process, the treasurer would be

involved in the final collection of cash, and

any onward cash management process.

In the purchase to pay cycle, the treasurer

would be required to ensure funds were

available to meet the payment obligations.

In both cases, some form of cash forecast

reports would probably be prepared.

The treasurer’s historic involvement in the

working capital cycle

Today it is much more likely that

the treasury department will use its

expertise to improve the efficiency of the

company’s operation in all three cycles.

The management of working capital and

financial risk is central to the treasurer’s

task. Understanding where risk arises and

where funding is needed means they can be

accurately measured and priced. In turn this

will help the company to price its activities

accordingly, so as to truly reflect the costs of

inputs and the risk of trade.

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Ordertodelivery

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Ordertodelivery

Collection

Accounts Receivable

Disbursement

PayableAccounts

Inventory

Cash

a focus on cash