The Role of Trade Finance in Working Capitalinclude effective quality control measures.
In some cases, this stage includes inviting
customers in to review the manufactured
goods prior to completion, or to allow
goods to be customised before finishing.
Many international standards are now in
place across a variety of industries.- Store finished goods.
Finished goods need to be stored
before being sent in fulfilment of an
order. There can be significant costs
associated with storage, ranging from
the cost of warehousing (which may
include the cost of temperature control
in certain circumstances) and insurance.
Some items perish or have use-by
dates, so there is a risk that goods will
remain unsold, in which case there will
be additional costs arising from the
disposal of unsold or damaged items.
Many companies now have regional
distribution centres both domestically
and internationally to enable more
efficient fulfilment. - Deliver finished goods to shipper or
customer.
The final stage is to ensure goods are
delivered, undamaged, in a timely fashion
to the end customer or to the shipping
company. The process used will depend
on the nature of the manufactured goods,
and the location of both the producers and
the end customers. Where international
trade is included, there will be a focus
on ensuring appropriate documentation
is in place to allow the passage of the
goods through customs and to ensure
appropriate protection of the producer’s
interests through insurance and, possibly,
the issuing of letters of credit.
The financial order to delivery cycle
On the financial side it is important for the
company to ensure the appropriate costs
are assigned to the various stages of the
inventory cycle. It is possible, for example, to
calculate the costs of storage of both inputs
and finished goods, as well as the cost of
processes in between. This will require some
judgement, particular when assessing the
actual, rather than the accounting, cost of
depreciation of materials, and when trying to
assess the true cost of employing staff on the
production line.
The company should be able identify
the true costs of production. Moreover,
the company will also want to identify the
marginal costs of production. In some
companies the marginal cost will be relatively
constant, but a point may be reached where
existing facilities (such as warehousing) or
production capacity (such as machinery) are
fully utilised, resulting in a significant increase
in the marginal cost of any further production
at that point.
Providing production managers with this
information may enable them to prioritise
processes. For example, it may be appropriate
to consider outsourcing certain activities,
perhaps by splitting the production process
into two, or by warehousing semi-finished
goods with a specialist. It is, though, vital that
any changes in production methods should
only be made after an assessment of all the
operational risks those changes might pose.
Whether or not the cost of production can
be reduced, the fundamental challenge for
the treasurer is to finance the process from
the point at which inputs have to be paid for
until such time as cash is received. This gap
in working capital finance can be financed
in a variety of ways – through bank loans
or overdrafts, from cash generated by the
business, or from non-bank finance, ranging
from commercial paper issuance to factoring
and invoice discounting. When arranging
finance, the treasurer will want to ensure it
as efficient as possible, whilst simultaneously
representing the lowest risk to the company.
We will address both of these in turn.
First, raising cash as efficiently as possible
is clearly central to the company’s ability to
maintain competitiveness for its products.
Different companies have access to different
forms of finance, depending on the nature of
their business, their location and the size of
their operation. (There is more detail on the
different forms of finance on page 104.) The
treasurer’s primary role in this regard is to
determine the most efficient mix of financing
for the company as a whole. For example, it
may be possible for the company to arrange
a cheap overdraft by pledging a building or an