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Created on 12.11.2018 | Updated on 04.12.2019

Supply chain finance in Swiss companies: food for thought

Are we managing our working capital properly – including across company boundaries? This was the focus of the Working Capital Management (WCM) Study 2018, with a focus on supply chain finance. These are the most important facts and recommendations for managing your working capital along the value chain.

With supply chain finance (SCF), companies include all value chain partners in their WCM. This holistic WCM approach means that companies can manage their working capital (and, in turn, also their liquidity) beyond their own company boundaries. The WCM Study 2018 conducted at the University of St. Gallen shows Swiss companies’ position with regard to supply chain finance and the areas where action is required.

Fact 1: Liquidity flows slowly in Swiss companies

C2C cycle components by international comparison

Extremely low DPO and high DIH mean that Swiss companies have the longest cash-to-cash cycle in comparison with other European countries.

Swiss companies must pre-finance their sales for the longest in comparison with other European countries: at 79 days, they have the longest cash-to-cash cycle and the greatest lapse of time before cash outflows are converted into cash inflows. One reason for this is extremely low days payable outstanding (DPO). The DPO – the number of days between the receipt of invoice/invoice date and payment execution by the company – is just 26 days on average. This means that Swiss companies settle their invoices ahead of schedule. Another reason for the low cash-to-cash cycle is a relatively high DIH of 52 days for inventory. This indicates how long a company ties up capital in inventory; in other words, how many days stock is kept at the company, from delivery of goods until their sale by the company. High DIH means the companies have high inventory levels.

Recommended actions: Use reverse factoring for targeted cash flow management

In a holistic WCM approach, the company’s strategic objectives must always be taken into account. If, for example, a company wishes to stand out from the competition by positioning itself as a preferred customer vis-à-vis its main suppliers, it is advisable to settle outstanding invoices quickly. To achieve this goal without having an adverse effect on your own liquidity situation, the SCF reverse factoring instrument – where suppliers receive payment earlier and extend their own DPO to 90 days, for example – is an ideal solution. Reverse factoring enables targeted cash flow management as well as creating classic win-win situations typical of a holistic WCM approach.

Fact 2: Swiss companies wait longer for their payments than agreed

Payment terms with customers

There is a big gap between the agreed and actual payment deadlines agreed at Swiss companies.

Swiss companies have to contend with high levels of receivables. The difference between the agreed payment deadlines and the actual settlement dates is 16 days or 44% at large companies and 18 days or 52% at SMEs.

Recommended actions: use factoring to avoid high receivables

The SCF factoring instrument is a good way of bridging the gap between the agreed and actual deadlines. Companies transfer their receivables to a financial services provider which then settles the outgoing invoice and, if required, handles the collection of customer payments according to the terms agreed with the company. With silent factoring, the customer does not know that a factoring service provider is involved. Silent factoring is ideal if, for example, customers react sensitively to the sale of receivables, or if a company wishes to avoid its customers assuming that it is facing financial difficulties.

Fact 3: Room for manoeuvre with the use of trade finance and supply chain management instruments

The image shows that the proportion of total assets financed with trade finance and SCF instruments stands at 5% on average for all companies – that figure reaches 20% for top companies. This shows that a big gap exists.
The proportion of total assets financed with trade finance and SCF instruments stands at 5% on average for all companies – that figure reaches 20% for top companies.

On average, Swiss companies finance only 5% of their total assets with innovative trade finance and SCF instruments – that figure reaches 20% for top companies. Around a third of all finance managers surveyed believe their company’s financing structure will change significantly over the next five years.

Recommended actions: use SCF solutions in working capital management

Comparative international studies also show that Swiss companies are still reluctant when it comes to using SCF instruments such as factoring, reverse factoring and dynamic discounting. This is despite the fact that the market is currently experiencing rapid growth and that there are innovative solutions available which open up new opportunities for holistic WCM in the supply chain. This opportunity should be seized. When implementing solutions, it is worth concentrating efforts on those companies with which the majority of sales or procurement costs are generated. On the customer side, involving those with the best credit standing is the best approach. Improvements can be achieved efficiently in this way.

Fact 4: Is less always more? Not when it comes to working capital

Relationship between C2C cycle and performance

An inverted U-shaped relationship exists between company performance (ROCE) and the C2C cycle (in days).

The widespread view that “less is more” in WCM should be treated with caution. An analysis of SPI companies shows that company performance falls if working capital is both too high or too low. There is an optimal level of net working capital which has to be aligned with the company’s strategic goals and take account of the supply chain.

Recommended actions: Determine the right working capital level for your company

Every company has to determine the right level of net working capital for itself – taking account of any factors both within and outside the company which significantly influence net working capital. The most important internal factors include the company’s own liquidity situation, bargaining power and strategic positioning towards suppliers as preferred customers. External company factors are customers’ and suppliers’ market power, the liquidity situation, the size of the customer base and country-specific payment practices. A systematic analysis such as is offered by PostFinance’s team of WCM experts helps companies to define their individual profit-maximizing working capital level.

Full version of the WCM Study

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