The Role of Trade Finance in Working CapitalCase study
Subsidiary of a major multinational wanting to improve its
working capital position
A European subsidiary of an international telecommunications equipment
manufacturer was seeking to improve its working capital position by extending
its DPO (days payable outstanding). It operated on 45 DPO, but wanted to
extend that to beyond 90 DPO. In addition, it wanted to make its supply chain
more robust.
Its solution was to work with its bank to
create a supply chain finance solution.
The subsidiary concentrated on its core
suppliers (about 15% of its original
suppliers) and provided them with the
opportunity to access cheaper funding via
a supply chain finance programme, using
the group’s superior credit rating.
A key challenge was to automate the
processes. Invoices approved by the
subsidiary are automatically uploaded
to the bank’s own proprietary trade
finance platform. Once uploaded, the
platform sends an automated notification
to the suppliers. The suppliers can then
choose whether to discount the approved
invoices. If they decide to do so, they
receive payment from the bank. If not, the
platform initiates an automatic payment of
invoices on the maturity date.
The subsidiary has now extended its DPO
to 90–100 days, while mitigating the impact
on its key suppliers via the supply chain
finance programme. Its suppliers are able
to accelerate receipt of cash by receiving
a discounted payment shortly after the
buyer has approved the invoice. As well as
extending DPO, the automation process
required an improvement in efficiency
leading to a reduction in operational costs.
Given its success in achieving its
objectives, the programme is being
extended to other subsidiaries within
the group.Process diagram
BankBuyer Supplier4
5 3b 3a^62
1 1 Delivery of goods, invoicing
documents
2 Goods received and transfer of
rights
3a Agreement on sale of receivables,
transfer of rights, etc.
3b Acknowledgement of assignment
and payment confirmation
4 Payment less discount interest
5 Payment of the total invoice value
6 Payment of the undiscounted
invoices on the value date