StreamALERT e-Newsletter- April 2005

Optimizing your Financial Supply Chain to Slash Costs and Drive Efficiency

Emerging financial solutions that enable trading partners to seamlessly exchange transaction-related information and funds are about to indelibly change the payables and payment landscape. Enabled by new Internet tools and Enterprise Resource Planning (ERP) systems, this new breed of networks is beginning to make significant inroads into reducing inefficiencies and driving costs out of companies’ financial operations. A new term called Financial Supply Chain Management is being used to describe these systems, which offer real-time collaboration between suppliers and buyers.  Demand for these new systems is being driven by the dramatic improvements in working capital management.

Given the historical lack of innovation in this arena, today’s buyers and suppliers are experiencing a number of problems which prevent true optimization of the financial supply chain. This is especially as it pertains to settlement of payables and cash flow visibility. Even though automation has already delivered tangible results in the physical supply chain, these effects have barely trickled into organizations’ financial operations. Unlike improvements enjoyed by the automation of physical supply chain transactions, today’s payable and collection processes are still primarily manual, non-integrated and inefficient.

Recent business challenges and the ongoing drive for efficiency have compelled businesses to shift their attention to their financial supply chain operations. Increasingly, organizations are striving to improve the financial side of the equation as effectively as they have improved their physical supply chain. To many innovative financial managers, the financial supply chain is now recognized as an area offering significant potential for not only generating bottom-line improvements but also greater ability to monitor and assess receivables, strengthen working capital positions, and build stronger trading relationships.

Web-based technology solutions that address the existing inefficiencies in the financial supply chain and help organizations enhance working capital management are rapidly emerging by offering the following functionality: (a) electronic settlement, (b) self-service vendor management, and (c) dynamic discounting.

Electronic Settlement: Harnessing the power of the Internet, financial supply chain solutions shift paper payments to an electronic environment and streamline the settlement process. Electronic payments have also enabled organizations to achieve operational efficiencies and significant cost savings through reduced bank charges and lower cost of payment reconciliation, invoice processing and fraud losses. Our recent research indicates that the loaded cost of payment processing is roughly $2.00 – 3.00. Electronic settlement can slash these excessive processing costs by more than 50%.

Self-service Vendor Management: Web-based financial supply chain solutions accelerate the exchange of information between buyers and seller and provide improved visibility and control over the financial transactions. Suppliers receive notification immediately upon completion of the buyers’ payables approval process, allowing them to monitor and assess their receivables in real-time. All authorized parties can also view the transaction status and details online, reducing the number of vendor inquiries and exceptions received by buyers. Both buyers and sellers receive payment data and remittance detail electronically facilitating reconciliation of payables and receivables.

Dynamic Discounting: Dynamic discounting, also known as supplier financing, allows buyers and sellers to tap into an alternative source of working capital and reduce their working capital costs. Supplier financing offers suppliers the flexibility of discounting some or all of their receivables, eliminating the need to utilize high-cost financing options like factoring or asset-based lending to obtain cash liquidity and stronger balance sheet positions. It also mitigates the uncertainty surrounding the timing and amount of payments, allowing for superior cash flow forecasting capabilities. On the other hand, supplier financing enables buyers to accelerate their cash conversion cycle by extending their payments terms and compressing working capital requirements without adversely affecting trading partner relations.

It is clear that financial supply chain solutions help foster closer collaboration between all parties in the supply chain while reducing costs and increasing bottom-line benefits for buyers as well as sellers.

PayStream Advisors’ forthcoming Corporate Insights Report titled, “Web Invoicing & Electronic Payments: Moving Beyond Paper “profiles eight of the leading solution providers in this area and offers valuable insights into the electronic invoicing and payment capabilities provided by their solutions. This report helps managers compare and contrast different solutions to identify the one that bests suits their organizations' requirements. The report will be is available online at https://paystreamadvisors.com/store/index.cfm in May 2005.