Corporate Financial Practice: Factoring, Supply Chain Finance & Global Treasuries Research Paper Starter

Corporate Financial Practice: Factoring, Supply Chain Finance & Global Treasuries

(Research Starters)

This article discusses business finance and topics to be introduced for discussion include management of accounts receivable and payable, supply chain finance, and the move toward globally integrated treasury functions. Companies, both buyers and suppliers, require access to quick and inexpensive capital to remain solvent and competitive in the marketplace. The practice of factoring, which is when a company sells its accounts receivables, is discussed as an option for many companies to increase cash flow. Supply chain financing integrates a company's finance functions with its physical supply chain and promotes transparency in interactions between buyers and suppliers along the supply chain continuum. Globalization of markets has led to rise in global corporations that are finding the need to centralize treasury and finance functions across all operation entities. Best practices and trends in implementing global treasuries are discussed.

Keywords Corporate Finance; Centralization; Factoring; Global Treasury; Supply Chain Financing

Finance: Corporate Financial Practice: Factoring, Supply Chain Finance


Business finance or corporate finance is a broad term that describes all aspects related to the allocation of an enterprise's financial resources. The allocation of a company's financial resources should be done in such a way as to support the initiatives, value creation and growth of an organization. Finance departments are tasked with many different responsibilities that include budget creation, and resource mobilization (which includes managing a company's debt, equity, savings and investments). Finance departments are responsible for preparing, maintaining and auditing a company's financial statements.

Business finance departments and personnel are responsible for managing the cash flow, accounts receivable and payable and investments for their organization. Working capital, whether it be from sales, loans or returns on investment, enables companies to pay employees, invest in supplies and equipment and grow the company in terms of sales or market share. A company's finance department plays a pivotal role in managing the flow of capital in and out of a company, as well as in helping to plan for and finance company strategies. Finance departments have long compiled and maintained comprehensive metrics as part of a company's financial statements. For many public and private companies, financial data often accounts for the most detailed and comprehensive metrics that a company has. Financial data has been sought after by company owners, investors and more recently has been required to meet compliance and regulatory requirements such as Sarbanes-Oxley. Today's company finance departments are increasingly responsible for tying financial metrics to business operations through the strategic planning process. Today's organizations (both public and private) are much more likely to have global subsidiaries and international partners within their supply chain than in the past. This essay discusses a number of current topics related to business finance; the implications related to business finance in both public and private companies is also discussed along with some of the methods that companies are employing to better manage their accounts payable (AP) and accounts receivable (AR). Receivables are the "outcome of doing business" by receiving payments from satisfied customers in return for goods or services (Salek, 2007). By definition, every company must manage receivables if the company is selling either goods or services. Unless goods are paid for at the time of purchase with cash, a company must manage outstanding payments from its buyers. This essay discusses how some innovative companies are managing not only their receivables and payables, but also integrating these functions into existing supply chains. The integration of supply chains and finance is known as supply chain financing (SCF). Stakeholders in supply chains include buyers and suppliers; the needs of these two groups of constituents are examined in terms of their need to access low cost and readily available capital.

Receivables are among the three largest assets of 75% of Fortune 500 companies. Companies manage receivables through credit control and the collection and payment process (Salek, 2007). Treasury functions surrounding the management of AP and AR are increasingly important to global organizations. Cash flow forecasting is critical to organizations, because access to working capital (cash on hand, equity, or credit) is essential to maintain business solvency. The emerging role of the Global Treasury is explored in this article and a number of best practice trends are outlined. As companies expand their global reach and operate global subsidiaries, the need to centralize treasury functions becomes more pressing.

Applications Factoring

Factoring is the process by which companies sell some or all of their accounts receivable to a third party as a means to generate ready cash. Instead of waiting for customers to pay up, companies can secure a third party to give them a cash advance on their outstanding AR. Factoring can be an expensive undertaking for companies that choose this option to generate cash; borrowing rates typically exceed those that a bank would charge. Some companies and industries have difficulty securing bank financing and for these companies, factoring is a viable option.

Factoring AR may be more cost effective than some traditional financing options because a bank calculates interest on a company's entire line of credit (even if a company is only using only part of it). Factoring is essentially an advance against accounts receivable, with interest paid only on the money being used. Other aspects of a factoring agreement include (Kroll, 2007):

  • Increased flexibility in maintaining cash flow.
  • Ease in outsourcing AR functions: A company doesn't need to maintain international AR software or pay a staff.
  • Factors advance some portion of the value of receivables to the client (AR = collateral).
  • Factoring is asset-based financing (on time or revolving purchase of a company's AR).
  • A factor collects and pays clients the portion that was held back minus any fees.
  • Factoring companies can provide credit, collection, and accounting services as well.

Factoring is very accepted in Europe but not as much in the U.S. where factors are sometimes seen as last resort lenders. Factoring has gained more widespread popularity in some sectors of the U.S. economy, such as retail and manufacturing, but is also becoming popular in other industries. In fact, the use of factoring services grew 12% between 2005 and 2006.

Good Candidates for Factoring

In essence, any company that has good receivables could use factoring as a way to keep cash on hand. There are many companies that have not been in business long enough to establish a credit history or haven't gotten a warm reception from banks, these companies may want to use factoring for a few years. Many in the field of finance warn that factoring can lead to a slippery slope that can put a company at risk. While some companies have successfully used factoring as a long term strategy, many suggest that factoring is best used as a temporary solution for generating cash.

Cash constraints present real obstacles that can limit a company's growth. For companies that don't have ready access to traditional sources of financing, factors have proven to be valuable as a way for companies to access quick capital. Factors are generally willing to make a 60-90% advance on face value of AR and charge 2-6% on invoices every 30 days. There are two different types of factoring agreements that a company may enter into — each assigns risk to a different party. Some estimates have put the annual cost to companies that factor at 20% (Kroll, 2007).

In a non-recourse agreement, the factoring agency assumes all risk and the customer has no legal claim. In cases where the factoring agency assumes risk, the factors closely scrutinize a client's customers to assess the risk of their not paying on their invoices.

In a recourse agreement, outstanding receivables are deducted from a company's reserve payments to insure that the factoring agency will get paid (Kroll, 2007).

Third Party Financers

There are a number of 3rd party entities such as banks and institutions that are interested in buying into...

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