The Role of Trade Finance in Working CapitalCase study
An Asian retail buying group wanting to streamline the process
for submitting letters of credit (L/Cs) to its banks
A European retail multinational set up a subsidiary buying group in Asia to act
as a central procurement hub for the group. The purpose of establishing this
unit was primarily to improve communications with key local suppliers – i.e.
to be in the same time zone and able to respond more efficiently to customer
queries and new business opportunities. Since starting operations the subsidiary
has opened thousands of L/Cs with the group’s Asian suppliers. The company
quickly recognised that improving the efficiency of this process could produce
significant benefits for the group as a whole.
The company approached its bank to
identify which improvements could be
made. Because of the volume of L/Cs the
subsidiary was opening, the company
was wasting significant time having to log
on to each of its bank’s trade platforms.
This was solved by getting a direct feed
(host-to-host connectivity) from its back
office accounting system to the bank’s
trade platform. This allowed information
to flow between the two systems, without
the need for manual intervention. New
workflow was also introduced to accept bill
settlement instructions by encrypted email.
In addition, specialist trade advisors at
the bank identified ways to simplify the
structure of the L/Cs being issued to the
company’s suppliers, thereby reducing
the time spent, and errors incurred, in
the process.Finally, the company was able to integrate
its trade activities into wider working
capital management programmes,
allowing it to improve cash flow, reconcile
payments and improve the efficiency of
its foreign exchange activities. All of these
techniques represented improvements in
the company’s use of working capital. Improved reporting.
Automation of processes (and
outsourcing) also ensures improved
management reporting, as data can be
interrogated in many different ways. This
allows treasury to maintain a clear view of
activities in often disparate organisations.
In addition, this also provides a much
clearer audit trail compared with paper
documents, which can provide significant
benefits when reporting under Sarbanes-
Oxley or similar requirements.
Interaction with other parties in the supply
chain
The other key element to the success of
financing along a whole supply chain is the
opportunity for companies to share data
between themselves.
Electronic invoicing is perhaps the first step
towards integration. This allows companies
to interact electronically on both accounts
payable and accounts receivable to cut the
time and cost involved in processing and
reconciling invoices and payments. Figures