CloudTrade Podcast - Episode 6 - Trade finance
Watch the podcast here, if you’d prefer to read about what was discussed, please read on.
In the sixth episode of the CTTV podcast Steve Rogers, CFO, discusses with Steve Britton, Director of Sales, the options around trade financing, and how the 100% accurate data that CloudTrade’s solution extracts from the supply chain is so valuable when making key financial business decisions.
Steve B: Good afternoon, Steve. Welcome to CloudTrade CTTV. This is number six in the series. Steve Rogers who's with me today is our Chief Finance Officer, and the subject that we've decided to talk about in the context of the CloudTrade service is trade finance. What does that mean to businesses now? It covers all aspects of procurement and from CloudTrade’s point of view, just for the listeners who aren't familiar with us, we specialize in receiving and processing human-readable business transaction documents such as invoices. Trade finance obviously plays very well with processing an invoice, so from your point of view as CFO, what does trade finance mean to you and how do you think our customers would relate that to what CloudTrade can deliver?
Steve R: Thanks, Steve. I think I would take it back one step even further if I may, to start off with and talk about the data that exists in the organization. We all know that data is important to making key decisions in businesses and I think it's important that as a CFO, and other finance professionals will probably agree, processing an invoice isn't just a standalone transaction. You think about it over a period of time, somebody says, oh I've just processed the invoices, well what you've done by processing those invoices is receive a whole load of data around what we've bought, how much we’ve spent, products - so it's got that whole importance. I think it has to be taken in context of the importance of extracting the data from your supply chain, rather than simply a function that is just a means to an end, and I think that the data has to be accurate to have any meaning, like most things.
“…processing an invoice isn't just a standalone transaction.”
It's fundamental to me to get information as accurate as you can, and the trade finance angle really depends on what an organization's requirements are from trade financing. As we both know, you can get the trade financing on financing receivables if you're not getting your cash in quick enough from your customers.
Steve B: So that's what we affectionately call factoring.
Steve R: Yes. So typically you might get 85-80% of your invoice value, but you get it quicker off somebody who's providing that finance. So these are my sales invoices; rather than me waiting 30, 60, 90 days for the cash to come in, I can effectively sell that invoice to a finance organization who will then, as you say, give me 80-85% of the value straightaway. And then there's reverse factoring: if somebody else pay your suppliers, you can pay them on greater terms.
“The invoices have to be correct.”
For anybody to enter into an arrangement, whether it’s factoring or reverse factoring, they are wanting to know that the information that they're making those decisions on is accurate, because in effect they are lending you that money. The invoices have to be correct. They have to be real. They have to be authorized by the business. The biggest issue in factoring is invoice fraud.
Steve B: Sure. I can see a number of benefits which I think we should explore. So I've got invoices I need to pay, for goods or services I've received, and let’s look at the benefits of the CloudTrade service which is extracting data off an invoice and providing 100% accurate transfer into the back-end system.
If I was a lender to fund payment of those supplier invoices, knowing that I've got accurate data and it's been validated through a system, not through a human being where there could be errors, validated that this invoice is due for payment, then I'm going to have the confidence to say, Oh I'll advance the funding for that. Now, as a buyer to take advantage of that I guess that's going to be expensive, so typically how would that be funded?
Steve R: Factored or reverse factoring isn't done at 100% of the invoice value, so the finance providers are making their margin on that basis. As a business, if I'm not having to pay for those supplier invoices, what else can I do in the business with that cash that I'm generating, or the cash I'm holding on to for longer? I can plan my cash flow on that, or I can make an investment in the business if there's something else to spend that money on.
“It is important to have the detail and accuracy in the data, so it can be trusted and then used for the financial strategy of the business.”
One of the worst things in the world would be if you're relying on an OCR or a manual-based system, and you put this forecast together based on the invoices that you've processed so far, and then you find that there are errors in them, and then you know that could throw out long-term plans quite quickly. It is important to have the detail and accuracy in the data, so it can be trusted and then used for the financial strategy
Steve B: Yes, it's interesting. We're hearing all the time ‘accurate data’, ‘trusted data’, and not just for trade finance. My own personal experience is you settle an invoice in 30 days, and it's net, so whatever the net value of the invoice is, you pay that. If you pay early, maybe say in 10 days, then something like maybe 2% could be offered as a discount. And, it's great news for the supplier because they're getting the cash early.
Just one of the things that strikes me about this is around the supply chain. If I'm a manufacturer, and if I'm reselling goods etc, my supply chain is critical for me because without that I haven't got the raw materials to convert and to make into a profit. So in terms of processing an invoice in a timely manner in the supply chain finance, let's just explore a little how that helps the supply chain.
Steve R: It's sector and industry specific. If you think about manufacturing, they need the inputs to be of a certain quality, and they need to make sure that their suppliers have that quality, and can supply the volumes that they need. We've all heard horror stories about dealing with big businesses where suppliers don’t get paid. And we've had sharp intakes of breath with big companies when we find out that 90-day payment terms is the opening gambit.
“It's all about having the relationships with your suppliers, so that you know if there are working capital issues…”
So I think as a CFO you've got to know your requirements of your supply chain versus how quickly you're going to get the money in and find the right compromise. It's all about having the relationships with your suppliers, so that you know if there are working capital issues, you've got to be able to have those open conversations. It's slightly off topic, but radio silence is what kills relationships.
Steve B: Absolutely.
Steve R: I'm going to want to get paid as quickly as possible for the items we sell, and I'm going to want to try and pay as long as possible on the items I'm purchasing. If people ring you up saying that an invoice is a week overdue, not responding to them is going to let them draw their own conclusions. And if that supplier is key to you running your business, then you're really putting your business at risk by doing that.
“…if I'm taking my supplier invoices in, and I'm capturing that data automatically, and I know that's accurate,.. then this gives me the confidence that I can agree a payment plan…”
So I would always try to keep that in mind. But again we'll go back to if I'm taking my supplier invoices in, and I'm capturing that data automatically, and I know that's accurate, and it's going straight into my accounting system, then this gives me the confidence that I can agree a payment plan, I can action a payment run for the end of the month, I can get that information in advance, and that gives me certainty around the cash flow.
Steve B: Absolutely. Fantastic. So let’s think again about the CloudTrade service, and putting the conversation around trade finance into context, thinking about the receipt of an invoice, the efficient processing of the data, and making sure that that's trusted, accurate data that gets delivered into the finance system. This enables support of paying on time or trade finance and supply chain financing, i.e. paying your supplier invoices early. So it's a win win. It's a win for the buyer, a win for the supplier, and as we've just been discussing it helps the overall supply chain relationship which is critically important. So who would have thought just capturing data off an invoice could have such a major impact across the whole supply chain?
Steve R: Absolutely. We've got partners who use our services as part of their supply chain finance. So it has got to be key to that because it's less people making decisions around the data, because it's being captured quickly and accurately. It just makes sense. We've touched a little bit on the dynamic discount when you were talking about settlement discounting. I think that's evolved as technology has evolved. You probably haven't got to go very far back until settlement discount was something that was stated on an invoice, with an early payment incentive.
We have now moved on. As a supplier, I may have a portal where, once my invoices are approved through a workflow system, they will be there to have the value drawn down. If I left it alone for 30 days, I would get the full invoice value. If I took it a week early, I would get 98%. Which I think is really good. You can just say, well look you take this invoice value on whatever day you want to, and here's the impact. And that's really useful because it means I haven't got to have one rule that I can't move away from. So at certain times of the month I want that invoice as soon as possible, around payroll and PAYE or whatever. But at other times I might be happy. I might have a decent cash balance, I might rather wait the 30 or 60 days, and get the full value because you might not have anything better to do with that cash.
“… it comes back to that frequency and accuracy of the data being captured.”
Finance is cheap at the moment, so if you're not going to get interest in the bank, depending on your kind of internal return rate in the business, you might have anything that you're going to get the percentage on, so you might just think I'll leave it there. That's quite interesting, and we play our part in that with our partners who offer financing. But again it comes back to that frequency and accuracy of the data being captured.
Steve B: Fantastic. Well as I started off by saying, a really interesting subject - very broad, very deep as we've expressed today. So thank you for your time. And just for our listeners, if anybody does have an interest in discounting and accuracy of data or trade finance, as Steve has mentioned through our partners we can certainly engage and look to see if we can help. So please get in touch using the usual contact details on our website etc. So thanks everybody for your time. Steve, thanks for yours this afternoon and look forward to our next discussion.
Steve R: OK. Thanks, Steve.
Steve B: Take care.