An overview of supply chain finance, blockchain, and the Cloud
Blog //05-05-2022

An overview of supply chain finance, blockchain, and the Cloud

by Amanda Grant, Chief Product Officer

A growing need exists for a supply chain finance infrastructure that allows organisations and financial institutions to deploy more scalable, flexible solutions. The pandemic kicked the finance and accounting industry's previously slow digital transformation strategies into high gear.

Due to security regulations regarding data handling and the lack of processes already in place, the sudden move to remote working of people at every stage of the supply chain presented a huge challenge for financial institutions.

Today, it is paramount that CFOs demonstrate agility, flexibility, and responsiveness when it comes to the operations of their supply chain finance. Innovation is the key to success for companies with continuous improvement across their supply chains and businesses - and who remain relevant and dynamic in a highly competitive market.

Supply chain finance allows businesses to improve their working capital, build stronger supplier relationships, and reduce supply chain risk. With the pace of change continuing to accelerate, your organisation must enhance the efficiency and transparency of its supply chain. Fortunately, newer technologies such as the Cloud, AI and blockchain can help simplify the process.

What is supply chain finance?

For companies looking to improve their working capital and cash flow position, supply chain finance (SFC) is arguably the most important solution. This underscores the increasing importance of supply chain finance programs, which often are not only an affordable source of capital but also help the ecosystem to improve financial structures, working capital, and payment flows.

SCF encourages collaboration between buyers and sellers. It is a term used to describe the use of technology-based solutions that aim to lower financing costs through the improvement of business efficiency for buyers and sellers linked in a sales transaction. This usually involves automating transactions, tracking settlement processes, and overseeing invoice approvals from initiation to completion.

SCF optimises working capital and provides liquidity between buyers and suppliers through the implementation of short-term credit. This allows suppliers to gain quicker access to money they are owed, whereas buyers gain more time to pay off their balances. It works best when the buyer has a better credit rating than the seller and can source capital from a bank or other financial provider at a lower cost.

One of the key benefits for both parties is that they can use the cash on hand for other projects to keep their respective operations running smoothly. For buyers, SCF allows them to negotiate better terms from the seller, such as extended payment schedules. Whereas sellers can unload products at a faster rate and receive immediate payment from the intermediary financing body.

How does supply chain finance work?

Although organisations may have different supply chain finance programs in place, most SCF processes commonly involve the following steps:

  1. Supplier uploads an invoice onto a supply chain finance platform
  2. The buyer approves the invoice for payment
  3. Supplier then selects chosen invoices for early payment via supply chain finance
  4. The supplier receives payment straight away, with a small fee deducted
  5. The buyer then pays the funder in full on the invoice due date

The benefits of using supply chain finance

Benefits for buyers

Buyers tend to focus on extending their days payables outstanding (DPO) whereas suppliers want to get paid as soon as possible to reduce their days sales outstanding (DSO). SCF can resolve the needs from both sides by allowing suppliers to receive payments early on, while buyers gain the flexibility to pay later on an agreed invoice due date.

Buyers can benefit from supply chain finance in the following ways:

  • As SCF supports suppliers with affordable financing, buyers can reduce the risk of disruption to the supply chain
  • Strengthens ongoing supplier relationships as SCF helps suppliers to improve their working capital
  • Improves working capital position through longer payment terms and an improved cash conversion cycle
  • By providing suppliers with the option of SCF, procurement teams gain an advantage when negotiating commercial terms, for example
  • SCF puts the supply chain in a better position to accommodate an increase in business when sudden accelerations make it difficult for suppliers to keep up with demand
Benefits for suppliers

SCF contributes to the supplier benefits of access to low-cost funding and DSO improvements without impacting their existing credit lines.

Suppliers can benefit from supply chain finance in the following ways:

  • SCF programs which leverage Cloud accounting technology provides suppliers with full visibility over the payments process, as well as increasing operational efficiency.
  • Taking advantage of early payment allows suppliers to reduce their DSO, which in turn improves their working capital position.
  • Improved cash flow means that suppliers will be in a better position to expand their businesses and invest in innovation.
  • Forecasting cash flow more effectively allows for better-informed business decisions as SCF offers greater certainty over the timings of payments.
  • As SCF is based on the buyer’s credit rating, this means that the supplier’s cost of financing is lower than for solutions such as factoring.
Benefits for finance teams

The replacement of on-premise and legacy accounting software programs with robust Cloud accounting software hosts a vast array of benefits for modern finance teams looking to automate and improve their existing supply chain finance processes.

Finance teams can benefit from using Cloud technology for supply chain finance in the following ways:

  • Cloud accounting software is much faster to deploy supply chain finance processes than linear on-premise or legacy software systems. The Cloud facilitates rapid ROI by avoiding long project queues as transactions are processed automatically.
  • By enabling a single source of truth, financial data and transactions become accessible anytime/anywhere and can be shared in real-time.
  • Supply chain finance processes in the Cloud can quickly lead to the connectivity that turns traditional supply chains into supply networks.
  • Supports highly distributed operational processes at a low cost, and allows for low cost-of-entry for organisations to build business cases and gain executive buy-in.
  • Helps reduce the need for substantial upfront capital investment– integration and configuration costs can be transferred into operating costs.

Technological solutions for supply chain finance

New cloud computing technologies are enabling breakthrough innovations in supply chain finance management processes delivered via SaaS (Software as a service) Models.

Of all the supply chain technologies, the Cloud will play an integral role as the implementation of Blockchain, IOT, AI and the digital supply chain will all require Cloud computing.

In a nutshell, the Cloud will be the most impactful technology in the supply chain for the foreseeable future based on its use of data interchanges in real-time. In the context of SCF, the Cloud centralises data and offers multiple entities access to that data which in turn decreases costs and speeds up supply chain velocity while factoring in the reassurance of data security.

As with any shared data system, there are security concerns to address when it comes to the handling of sensitive financial data and keeping transaction records securely stored. That’s where blockchain technology comes into the equation.

What is blockchain technology?

Blockchain technology stores digital data in a tamper-resistant way by using a distributed ledger to track digital transactions. Businesses can use blockchain technology to track any transaction, making it possible to share documents, personal information, and cryptocurrencies. For example, cryptocurrencies like Bitcoin, Dogecoin and Ethereum use blockchain technology to enable infinite and anonymous parties to conduct transactions without the need for an intermediary.

It can greatly improve the supply chain finance process by enabling cost-efficient delivery of products, improving communication across partners, enhancing traceability, and aiding access to financing.

Blockchain in supply chain finance

In a business context, blockchain allows a set number of known parties to conduct transactions with one another directly while improving cybersecurity, ensuring contract compliance, and reducing costs. Instead of coins, supply chain blockchains "tokenise" a variety of transaction-related data.

Each participant in the "chain" has their own unique digital signature, which is used to "sign" tokens moving through the chain. A chain of transfers between stakeholders records every phase of a particular transaction, allowing an audit trail built-in to the chain that cannot be compromised, as every stakeholder receives their own copy.

In the context of supply chain finance, blockchain has the ability to create an undisputable audit trail for all financial transactions. This in turn has the potential to increase trust between buyers and suppliers and strengthen these relationships over time. Like the Cloud, blockchain can also be used to achieve a single source of truth for financial activities such as invoice approvals and receipts. This plays an important role in determining which invoices can be paid early.

Additional benefits of blockchain include the process of enabling pre-shipment supply chain finance and the introduction of smart contracts to automate future transactions.

The future of supply chain finance

The future of SCF will also see the factoring in of the use of Internet of Things technology to share data with other machines and Artificial Intelligence to teach the machines how to execute their operations more efficiently each time.

In the supply chain, and elsewhere for that matter, there is another fundamental shift driving Cloud adoption. Companies are finally beginning to appreciate the value of the data they collect. Quite simply, data is the new currency, and how that currency is automated, processed and protected will continue to grow in importance.

Furthermore, data only increases in value the more it is accessible across enterprises. As the value of that data increases, the responsibility of companies, including transportation, will increase as we will be among those sharing it. It will be crucial for CFOs to work with the CIO to strengthen their internal data security network to ensure data integrity, otherwise significant financial liability may result. There is no denying that we aren't there yet, but the path to success is clear - look to the Cloud.

How Advanced Financials can support your business’ supply chain finance

There is considerable room to improve supply chains in terms of end-to-end traceability, speed of product delivery, coordination, and financing. For example, blockchain can be a powerful tool for addressing deficiencies and security concerns surrounding sensitive financial data. It is now time for CFOs who are standing on the side-lines to assess the potential of Cloud accounting technology, like Advanced Financials, for their business.

Finance teams that take advantage of the latest technology and trends made possible by Advanced Financials will be better positioned to adopt newer technologies that are on the horizon. By staying on the leading edge of technology adoption, your business will be in a better position to level the playing field with larger competitors and be poised for success moving into the future.

By setting the tone for your supply chain finance processes in the Cloud, you can ensure smoother operations in the future and the possibility of scaling up your business even further. Get in touch with one of our experts today.

Blog Financial Management Financial Services Advanced Financials
Amanda Grant

Amanda Grant

PUBLISHED BY

Chief Product Officer

Amanda joined Advanced in 2018 and was promoted to CPO in 2019 following a successful stint as Product Strategy Director, being responsible for the correct investment decisions.

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