The role of Chief Financial Officer (CFO) has historically been an internally focused one. Even when their sphere of influence and interaction did stretch beyond the four walls of the corporation, financeâs top priority remained supporting the needs and objectives of their own organization. In some cases, this led to finance being pushed to meet and exceed performance targets at the expense of suppliers and distributors: the very partners they were dependent upon for innovation and competitive advantage.
The notion of a well-managed âFinancial Supply Chainâ (FSC) has been around for decades, and the topic has received increasing attention in recent years. But what exactly does it mean? It is fine for onlookers to have a general sense of the FSC, but for those in positions of execution or leadership, the burden of understanding is (and should be) much greater.
Being able to make the distinction between Supply Chain Finance (SCF) , which centers around financing techniques, and the FSC, which tracks the movement of capital, risk, credit, and cash through the full series of financial transactions in the supply (and demand) chain, is essential. Looking at such broad activities requires us to take a holistic view of the supply chain instead of focusing on a singular enterpriseâs balance sheet.
From our perspective, here is the meaning of each phrase:
- The Financial Supply Chain (FSC) is the movement of capital, cash, risk, and credit back and forth between parties in the supply chain. The FSC extends from raw material producers, through multiple processors, to points of sale, and finally to the end consumer. Although there are differences between the number and types of parties involved, Business to Business (B2B), Business to Consumer (B2C), and Business to Government (B2G) commercial arrangements all have Financial Supply Chains.
- Supply Chain Finance (SCF) is a financial program put in place by a company that makes lines of credit available to their suppliers in an effort to simultaneously increase supplier access to affordable funding and decrease their costs. The capital for an SCF program may come from the purchasing companyâs working capital or be arranged as a line of credit through the companyâs bank on behalf of their suppliers.
When we use the phrase âsupply chainâ we mean the full supply and demand chain, incorporating the whole flow from the first supplier to the end-consumer.
The unanswered questions for companies new to working with the entire financial supply chain are nearly endless:
- How do all the available IT and financing solutions relate to each other? Are they different or the same?
- How do the solutions fit into the larger corporate context and is pushing Days-Payable-Outstanding (DPO) the correct metric for todayâs corporations?
- What if the money we release through SCF is spent and our credit rating drops, making it hard to continue funding the program?
- How can we achieve transparency through the whole supply and demand chain rather than stopping with first tier suppliers and distributors?
Everyone willing to explore the FSC is a visionary in their own way. These influencers are putting important changes in motion simply by establishing a discourse with their peers, an open and challenging discussion about the FSC: what it is and what it can become. This mindset represents a new approach to finance that has the potential to become an extremely powerful force reaching far beyond its own remits.
If SCF is supplier-centric, then the FSC is customer-centric.
Finance does not work in isolation. The FSC is an âecosystem playâ, both internally in the company and in conjunction with external stakeholders. Legacy finance practices are focused on reporting and compliance, making the CFO manage a disparate group of departments, often with diverging objectives and even different âlanguagesâ. The CFO has often had a singular balance sheet view and cannot continue in this mode if they are to increase the scale of their impact.
In response to the rise of customer-centric finance as a corporate goal, we formulate the following three concepts, which it is critical for the CFOs of today and tomorrow to understand and embrace:
- 1.Finance must take a customer-centric view if they are to be firmly grounded in the core business of the enterprise. All activities in finance should be evaluated for the benefit they create for the end-consumer, a practice which effectively erases the silos created through diverging priorities and focus.
- 2.Take a process flow perspective so that finance is not relegated to being an intermediary or supporting function operating and optimized as a silo. Instead, the flow of capital and risk from the first supplier to the final end-customer can be optimized using Lean Six Sigma-type methods to streamline the financial supply chain.
- 3.Allow the whole supply chain to innovate. This is most likely to happen if we ensure that capital, available credit, and risk are distributed optimally over the whole financial supply chain. Chains that leverage the capabilities of the whole ecosystem significantly decrease the long-term risk of corporate survival.
We cannot caution strongly enough against the limitations resulting from a finance organization that is focused on a single internal purpose. Even once we have expanded our perspective so that it appropriately includes the other internal and external stakeholders in the financial supply chain, the next step will be to place an emphasis on the correct activities and priorities and streamline our objectives and strategies.
Being customer-centric doesnât always come naturally for CFOs, treasurers, CPOs , or the head of accounting. Instead, these professionals have been trained and incentivized to focus on a two-dimensional spreadsheet version of the operation rather than the full three-dimensional effort itself. They risk becoming isolated as kings or queens in their own kingdom, one that falls increasingly out of alignment with the business as a whole. This is a recipe for building silos, and the longer it is allowed, the thicker the walls become. It might seem far-fetched to make accounting articulate the value they create for customers on a daily basis, and yet we believe with the right mindset this is entirely possible.
One way to break a siloed perspective is by regarding the movement of capital, risk, and credit as an uninterrupted flow so we can apply proven techniques from Lean Six Sigma to enforce customer-centricity and sort out what creates value and what does not. Transforming finance from a âsupportingâ process to a âcoreâ process is instrumental to making the role of finance strategic.
Customer-centricity repositions single balance sheet strategies such as extending payment terms to allow for the reduction of working capital by pushing it up or down the supply chain. The consequences of pushing payment terms out to the detriment of suppliers, something we refer to as the âworking capital dogmaâ, is common as a practice and as a performance metric for finance. It can create unnecessary risks by reducing the amount of capital available to suppliers to invest in innovation. Innovation is inherently risky and requires cash. With less available cash, the risk of failure increases and the delivery of successful innovation decreases. Pushing working capital out into the supply chain effectively outsources capital investments to suppliers. Conversely, taking capital out of the supply chain by extending payment terms âinsourcesâ responsibility for innovation to your own company, perhaps even without the assistance of supply partners. That might not be such a clever thing to do.