The Treasurer’s Guide to Trade Finance

The Role of Trade Finance in Working Capital

The three elements of the

working capital cycle

The working capital cycle can be broken
down into three distinct elements:

ƒ Purchase to pay.
This is a company’s procurement process,
ending in the company’s accounts payable
department.

ƒ Order to cash.
This is a company’s sales process, ending
in the accounts receivable department.

ƒ Order to delivery.
Sometimes referred to as the forecast-to-
fulfil cycle, this concerns the process of
manufacturing products and delivery to
the final point.

We will look at each of these in turn.

Purchase to pay – accounts payable

The procurement process in any company
must be such as to ensure that all the
required inputs to the manufacturing process
are in place when needed on the factory floor.
In order to reduce operational cost,
many companies have moved towards the
‘just-in-time’ approach to ordering, for a
number of reasons. First, with the increasing
sophistication of electronic communication,
inventory and the procurement process
can be managed more efficiently. In other
words, ‘just-in-time’ processes can work.
Second, because ‘just-in-time’ can work, the
benefits associated with it can be achieved.
Cash no longer needs to be spent, and
tied up, in inventory until that inventory is
needed. Because lower inventory levels are
required, there is no local cost of storage,
either in terms of the storage facility or
insurance. (The cost to the overall supply
chain may be lower too, as the provider of
the materials may benefit from economies of
scale, especially in the case of the storage of
perishable goods.) Note, though, that many
supply chains operating on a ‘just-in-time’
basis came under increasing pressure as a
result of the withdrawal of trade credit as a
consequence of the stress in the financial
markets in 2008.
At the other end of the process, treasurers

can make savings by improving the efficiency

of their accounts payable process, primarily in

three ways. First, by controlling disbursement

processes to reduce float and the level of

funds held in idle cash balances. Second, by

utilising the payment terms effectively. Third,

by using technology to automate processes

so as to reduce manual intervention, with the

additional benefit of a reduction in the risk of

error and fraud.

The physical purchase to pay cycle

1. Identify production levels.
   The first stage for all companies is to plan
   future production. How a company decides
   to do this will be dependent on the type

1 Identify production levels

2 Identify production inputs

3 Determine approved

suppliers

4 Select supplier

5 Agree credit terms

6 Authorise procurement

of goods

7 Accept delivery

8 Receive invoice

9 Process payment

10 Perform back office duties