When the Financial Accounting Standards Board (FASB) proposed a new rule last month that would require publicly listed companies to begin disclosing their supply chain financing activities, my first thought was that the devil’s in the details.
It also helps to keep that idiom in mind when distinguishing between supply chain finance and TreviPay’s closed-loop approach to delivering similar working capital management (WCM) and cashflow benefits along with many beyond-WCM benefits (one of those crucial details that I’ll return to in a moment.)
As finance and treasury folks well know, the specifics of new FASB rules are always important to scrutinize. (For those of you without green eyeshades, the FASB sets generally accepted accounting principles (GAAP) that U.S. publicly listed companies must use and that other organizations often choose to use.)
This rule proposal reflects the increasing use of supply chain finance and the growing desire from the investment community to get a more accurate read on public companies’ cash flows. How public companies respond to a final rule, which is not expected to appear until the second half of 2022, depends on their overall approach to financial disclosures (i.e., everything, only what’s required by the letter of the law or somewhere in between), their external auditing firm’s stance on the matter and the extent to which they use supply chain financing. Companies that use this mechanism should monitor how the FASB responds to public feedback on its proposal.
The term “supply chain finance” describes the optimization of working capital and liquidity among trading partners through a range of approaches and instruments. One of the most common approaches consists of a bank getting involved in a supply chain transaction by paying a company’s suppliers sooner (and at a slight discount) than the company would normally pay (e.g., immediately after the product leaves the warehouse vs. 60 days) and then collecting the full amount weeks later from the company.
Other forms of supply chain financing include reverse factoring, dynamic discounting, factoring, invoice discounting, inventory finance, and related techniques, as this Treasury & Risk primer lays out. The treasury and risk management consulting firm Strategic Treasurer differentiates between buyer-led approaches, such as factoring and dynamic discounting, and supplier-led approaches like reverse factoring and invoice discounting.
As treasury and finance teams consider working capital management solutions and programs, proposed financial disclosure requirements are less important to focus on than the advantages and limitations of different types of solutions.
Supply chain financing mechanisms are designed to accelerate cashflow and address related liquidity needs. This benefit is valuable in specific situations, such as when a smaller supplier needs to fund operations, growth or other endeavors sooner than the 60-90 days that its largest customer takes to pay an invoice. Those benefits depend on the size of the discount the supplier accepts, the length of payment terms extended to the buyer, eligibility and underwriting requirements and other factors. Supply chain finance benefits are fundamentally limited to the working capital management realm. Other, more expansive closed-loop systems (e.g., embedded payments) offer additional benefits related to customer experience, increased wallet share, operating cost reductions, data analytics capabilities, lifetime customer value improvements and more.
When considering a more holistic B2B payments solution vs. a supply chain finance mechanism, it’s useful to know that both approaches will deliver lower day sales outstanding (DSO), accelerated cashflow and working capital management improvements. It’s also helpful to delve into these solutions differ by asking the following:
- To what extent are underwriting and onboarding automated?
- Do credit lines remain on the balance sheet?
- How are the unique needs of all B2B purchasing stakeholders satisfied?
- Does the solution help drive stickier customer relationships, higher shares of wallet and higher lifetime customer values?
- Will the solution provider offer underwriting, customer support and accounts receivable (AR) service?
- Does the solution operate under the supplier/seller’s brand (i.e., white label)?