Supplier Finance and Process Optimization Glossary
What is supply chain finance?
Supply chain finance (SCF), a type of supplier financing, is a way of funding early payments through third-party financing. Also known as reverse factoring, supply chain finance typically provides suppliers with funding at more favorable rates than they can achieve independently. This is because the cost of capital is based on the buyer’s credit rating, rather than the supplier’s. Not to be confused with dynamic discounting – a self-funded early payment solution – supply chain finance is funded by third-party finance providers.
What is dynamic discounting?
Dynamic discounting is a solution that provides suppliers with the option to receive early payment in exchange for a discount on their invoice. Unlike supply chain finance, dynamic discounting is financed by the buyer, not a third-party finance provider. The idea of early payment discounts is nothing new. But in the past, this tended to mean sticking to fairly rigid terms. A common example is 2/10 net 30, whereby the supplier offers the buyer a 2% discount if an invoice is paid within ten days. Otherwise, the buyer can pay in full at 30 days. Today, dynamic discounting is far more flexible and allows suppliers to get paid at any time between the invoice being approved, and the agreed payment term.
A dynamic discounting example
Dynamic discounting allows suppliers to take early payment any time between invoice approval and maturity. Our solution provides a sliding scale of discount rates, giving both parties maximum flexibility.
What is working capital management?
Working capital is a short-term financial metric defined as current assets minus current liabilities. It’s essential to the health of every business, but managing it effectively is something of a balancing act. Companies need to have enough cash available to cover both planned and unexpected costs, while also making the best use of the funds available.
A company’s working capital performance can be measured in a number of ways, however the cash conversion cycle (CCC) is the main metric. The CCC is defined as the time it takes a company to convert its investment in inventory into cash, and has three components: Days Sales Outstanding (DSO), Days Payables Outstanding (DPO) and Days Inventory Outstanding (DIO). So companies can improve (reduce) their CCC in one of three ways: by extending DPO, reducing DSO or reducing DIO.
Working capital = Current Assets – Minus Current Liabilities
Cash Conversion Cycle = DIO + DSO – DPO
What is cash flow forecasting?
Cash flow forecasting is a way of estimating the flow of cash coming in and out of your business, across all areas, over a given period of time. It shows you your projected cash based on income and expenses. Accurately predicting your cash position is a top priority for any company, as it helps you stay on top of your cash flow, prepare for the future, and make better-informed decisions. A cash forecast typically covers the next 12 months, but it can also be used for longer periods of time, like 36 or 48 months.