Financial Supply Chain Management

                                          Supply chain financial management Supply chain management definition

  All facilities, functions, and things associated with flow and transformation of products and services from raw fabrics to customer, as well as the associated details flows
An integrated team of processes to "source," "make," and "deliver" products
The system of suppliers, manufacturers, transporters, distributors, and vendors that exists to transform raw fabrics to final products and supply those products to customers

            That portion of supply chain which returns subsequent to the manufacturing process is sometimes known as the distribution network
Types of supply chain
   1. Physical supply chain
   2. Financial supply chain
Physical supply chain refers to movement of products as was described earlier between the initial supplier to the  ultimate customer.
Financial supply chain refers to movement of funds resulting from physical supply chain
Integration of FSCN with physical supply chain
 Financial supply chain integrates with physical supply chain in multiple locations with things largely around payments and loans.
Generally banks give these services some time other agencies also provides
 Goal regarding the SCM
      SCM is concerned together with the efficient integration of suppliers, factories, warehouses and stores such that merchandise is produced and distributed.
    -In the right quantities
    -to the right location
     -at the right time
 In order to
      -Minimize total system cost
     -Satisfy customer service requirements
Need for financial supply chain management
       Benchmarks of business performance indicate that enterprise resource planning (ERP) processes and other enterprise technologies have transformed customer and  supply chain processes but that the performance regarding the finance function has hardly changed. Consequently some businesses have managed to improve the performance of their financial processes profoundly, financial functions are still neglected in many businesses, and day's sales outstanding (DSO) and working capital needs are very high in multiple industries. The working capital scorecard for 2008 from CFO Magazine demonstrates that there exists significant differences between high and little performers within an industry. Within the automotive industry, for example, the greatest score in DSO was 44, while the worst score was 241—five times higher than the sector median of 47. Studies from the Hackett Team indicates that finance department costs continue to consume higher than 1% of revenues in many companies, and CFOs struggle with poor transparency of their daily cash flows
     In times when unprecedented economic uncertainty and soaring stockholder expectations are putting every function below closer scrutiny than ever before, the finance function should be driving business, not holding it back. Financial supply chain management (FSCM) can help businesses to remove some regarding the inefficiencies in operational processes sequential to grow to more effective.
Definitions of Financial Supply Chain Management
There are different definitions regarding the term financial supply chain , which appeared for first time in 2000 and 2001. Regarding to studies business Killen & Associates (2001), the financial supply chain "parallels the physical or fabrics supply chain and represents all transaction things related to flow of cash from the customer's initial order through reconciliation and payment to seller." The Aberdeen Group, another studies company, calls the financial supply chain  "a section of B-to-B trade-related intra- and inter-company financial transaction-based functions and processes [which] begin prior to buyers and suppliers establish contact and proceed beyond the settlement process." The 3 definitions emphasize different topics. Killen's focuses on the parallelism between the physical and the financial supply chain, and it stresses a section of the cash flow collaborative nature of financial supply chain management and reveals that the financial value chain isn't limited to inner walls of a business but includes communication and cooperation with business partners
Both definitions focus on a process-oriented view regarding the financial supply chain  that is basically correct; however, in many respects the explanations do not leave distant enough:
They focus very many on the collaboration between companies—specifically, suppliers and customers—and they do not think about other important business partners within the financial supply chain, for example banks.
They describe primarily the status quo, and do not stress the different dimensions for the optimization of business processes within the financial supply chain.
The motivation, as well as the key , for an efficient financial supply chain are not obvious.
Another definition that includes these 3 aspects is the following: Financial supply chain management (FSCM) is the holistic and comprehensive planning and controlling of all financial processes which are relevant within a business and for communication with other enterprises. The goal of FSCM is to increase the transparency and the position of automation of business processes along the financial value chain. The purpose is to keep processing costs and reduce the working capital of the company. This definition does not think about where the financial supply chain actually begins and ends, due to the fact that there exists also analytical processes that are not directly related to a business process but which belong nonetheless to financial supply chain Key Performance Indicators There exists different key performance indicators that are relevant for measurement in financial supply chain management. One key metric is the cash flow cycle, which defines the period from delivery by suppliers until the cash collection of receivables from clients (Figure 1). It is the time period required for the business to receive the invested funds return within the shape of cash. The cash flow cycle should be divided into the operating cycle—which is the time period between delivery by suppliers and the actual cash collection of receivables, and the cash flow cycle—which is the time period between the cash payment for inventory and the cash collection of receivables. The detailed the cash flow cycle, the greater is the working capital requirement of a company, which means that a reduction of the cash flow cycle shall immediately free up liquidity  
Within the cash flow cycle we can differentiate the following parameters,

Days in inventory: This is the length of time between the delivery regarding the products and the invoice from the supplier, and the sale regarding the products and the invoice to customer. It describes the average many days the products of a business remain in inventory prior to being sold. This metric is the focus for all things around classical supply chain management 
Days in payables: This is the length of time between delivery regarding the products and the invoice from the supplier, and the actual payment for the inventory. This figure describes the average time it takes to pay a supplier. The parameter considers the outstanding receivables of a company, and is an important metric for debtors concentrating on their efforts to optimize the purchase-to-pay cycle.
Days sales outstanding: This is the length of time between the sale regarding the products and the invoice to customer, and the actual payment date regarding the customer. This metric measures the average many days businesses should collect revenue subsequent to a sale was made. A high DSO no. means that an enterprise is selling to its clients on credit and receiving detailed to collect money. The figure is an important figure for creditors, to optimize the order-to-cash cycle 
Days in receivables: This is the length of time between the sale regarding the products and the invoice to customer, and the expected payment date. This key p performance indicator is similar to DSO, and indicates the average time, in days, that receivables are outstanding. Days in receivables should possibly be called greatest likely DSO, since the business should collect all receivables prior to the  due date 

Within the cash flow cycle there is potential to reduce most days in inventory and days sales outstanding. Days in payables should be increased but should be monitored carefully to stay away from putting supplies at risk. Days in receivables should be reduced by optimizing cash collection. Another important indicator for an efficient financial supply chain management is  working capital, that is a balance sheet  metric and component regarding the liquid assets. working capital is calculated as current assets less current liabilitites, and is a measure regarding the liquid reserve and short-term solvency of an enterprise, available to satisfy contingencies and uncertainties. One regarding the key objectives of financial supply chain management is to optimize the working capital by reducing, for instance, outstanding receivables.
Supply Chain Flows
A supply chain is a network of partners that produces raw materials, subassemblies, and finished products, then distributes them via different sales channels to customers.
Along this chain, there exists 3 primary flows:
material, information, and financial
Financial Flows within the Supply Chain
Invoices and Payments
The financial flow in a typical supply chain includes thousands of invoices and payments in a provided year. The scale of this problem is challenging corporations to discover ways of streamlining their processing. There exists also considerable savings to be obtained in other categories besides processing improvements. Any single organization within the supply chain has most Accounts Payable (A/P) and Accounts Receivable (A/R) activities. Each invoice is an A/P from the downstream buyer's perspective and an A/R from the upstream seller's viewpoint. Multiple invoices, however, are often paid by a single payment. This requires details as to which specific invoices are covered by a remittance. Also, when invoices are reconciled prior to payment, the three-way match of purchase order (P.O.), shipping receipt, and invoice shall fail if all documents are not precisely consistent. Most of these potential failures can often be dealt with by innovative payment solutions with pre-established tolerances for automated processing
Information Transfer Financial flows also with details transfer via   Electronic Invoice Presentment (EIP) and electronic payments. This combination constitutes the Electronic Invoice Presentment and Payment (EIPP), an advanced payment application that automates specific financial tasks, as well as provides the opportunity to collect, aggregate, and share valuable details throughout the supply chain. Until recently, details and  financial flows were treated separately. However, innovative payment solutions can now with detailed transaction details for example date and time of receipt, supplier name, quantity received, P.O. number, etc. Possessing most financial and detailed product details available electronically can minimize person errors, reduce reconciliation time, and make a more tightly integrated supply chain. Importantly, banks can aid clients in ensuring that reconciliation and posting to General Ledger (GL) is integrated automatically
Supply Chain Management Challenges
Despite the fact that businesses have created a large many significant supply chain management improvements over the past decade, there exists still some unique challenges affecting operational efficiencies and service. The challenges listed here are those most closely related to what is commonly known as the "bullwhip effect," a term that refers to amplifications of end-consumer demand as one moves up the supply chain. How a business mitigates the bullwhip effect depends on the cause
CHALLENGE: Details Distortion
SOLUTION: Make sure that rapid details exchange along the chain
One cause regarding the Bullwhip Effect deals with details distortion. If consumer sales  increase by six percent in a provided week, a retailer should end up ordering 7 percent more product in response to increase and a feeling that demand shall continue. The next link within the chain, observing what appears to be an eight percent increase in demand, then orders a larger increase on his supplier. Eventually the factory shall observe an inflated 20 percent increase in orders
Delays in transmitting changes regarding demand or supply can amplify problems. A good method to deal with this situation is to share point-of-sales (POS) information
with all partners within the chain. Emerging electronic payment (e.g. card-based solutions) and details management tools give an unique method of sharing information. SOLUTION: Vendor-Managed Inventory (VMI)
Another method to deal with details distortion involves giving the supplier "decision rights" regarding the timing and quantity of replenishments. While many buyers shall have concerns about turning these decisions over to suppliers, there have been numerous
successful pilots and full-scale applications of this concept, called Vendor-Managed Inventory (VMI).
CHALLENGE: Miscommunication
SOLUTION: Collaboration and Integration
Companies along the supply chain are more collaborative compared to past. They can be sharing forecasts and attempting to operate in a highly integrated fashion such that the end customer perceives the entire supply chain as fully integrated. Collaboration can take
several forms. A simple sharing of forecasts between supply chain partners can often stay away from miscommunication about special promotions or other events that shall affect demand. More complex integration can take the shape of VMI
Information Transfer Financial flows also with details transfer via   Electronic Invoice Presentment (EIP) and electronic payments. This combination constitutes the Electronic Invoice Presentment and Payment (EIPP), an advanced payment application that automates specific financial tasks, as well as provides the opportunity to collect, aggregate, and share valuable details throughout the supply chain. Until recently, details and  financial flows were treated separately. However, innovative payment solutions can now with detailed transaction details for example date and time of receipt, supplier name, quantity received, P.O. number, etc. Possessing most financial and detailed product details available electronically can minimize person errors, reduce reconciliation time, and make a more tightly integrated supply chain. Importantly, banks can aid clients in ensuring that reconciliation and posting to General Ledger (GL) is integrated automatically
Financial Flow Management Challenges Most businesses require significant amounts of Working Capital to deal with variable and somewhat unpredictable financial inflows and outflows. When viewed collectively, the financial flow management challenges for example slow processing, unreliable and unpredictable cash flows, costly processes, high Days Sales Outstanding (DSO), and suboptimal credit decisions require higher Working Capital than necessary.
If these challenges were removed, the cash saved should be shifted to more valuable uses. Sequential to strategically address and minimize financial flow challenges and take appropriate action, one should first identify and evaluate the common causes. Manual Processes
Manual processes tend to be slow, unreliable, unpredictable, and within the final analysis, often more costly than automated solutions.
Lack of Timely Information
In many situations, financial flows do not contain sufficient detailed details for neither manual or automated processes to accomplish their jobs. Like a result, additional time and effort is required to obtain missing details (e.g., invoice-level detailed
information for example SKU numbers, item quantities, and P.O. numbers).
Lack of Employee Empowerment and
Spend Policy Compliance
If purchasing by individuals isn't carefully monitored and controlled, inappropriate spending shall occur, undermining the company's initiatives to manage expenses and improve strategic sourcing. Strategic sourcing requires businesses to have knowledge of how many they can be purchasing from different suppliers for different categories of product. Performing periodic analyses to make reports to help monitor spending and negotiate strategic sourcing with key vendors should be time-consuming and costly if this data is not captured electronically.
Delays in Invoice Reconciliation








Delays in invoice reconciliation are a specific cause of additional Working Capital; they delay receipt of payments and increase Days Sales Outstanding (DSO) of receivables. When there is a three-way mismatch of invoice, P.O., and shipping receipt, there is an inevitable delay while the mismatch is investigated. These investigations typically take time, as well as sum cost.
Processes for Setting Optimal Limits
Companies often maintain their own departments to set customer credit limits. However, the ability to set optimal credit limits shall require sophisticated algorithms that are often inaccessible to non-financial companies.
What's happening in
Supply Chain Management
Several trends and innovative greatest practices in supply chain management are now being observed in forward-looking companies. These include
Shared Services, Team Procurement
Companies that formerly had independent purchasing and payment operations at multiple sites are moving to a "shared services" model that centralizes these functions. The primary benefits of shared services with economies of scale and increased quantity discounts from suppliers. availability on the shop shelf for the end consumer They shall also measure their average response time to special orders, as well as their worst-case response time.
Supplier Web Portals for Inventory Data
Many businesses are instituting Web portals where suppliers can view inventory grades at the customer's location and POS or consumption data on materials. Sequential to implement Vendor-Managed Inventory (VMI), it is required that the supplier gain access to
the customer's inventory and consumption data. Such portals should possibly contain status details regarding the supplier's invoices.
Sophisticated Supply Chain Planning Systems
Modern supply chains have multiple levels, and it is often inefficient to manage each position independently. Different businesses have installed sophisticated supply chain planning processes to replace separate layers of independent decisions.
Extended Performance Measures
Progressive businesses currently work as component of an integrated supply chain and measure product
Collaboration Along the Chain; VMI
Leading businesses are working closely with partners along their supply chain to try to implement VMI. The evidence speaks loud and clean that VMI generally lowers inventories throughout the supply chain, increases higher product availability, and improves revenues.
Expanded Service Offerings
Often, a business should be asked to perform an unique service by two of its customers. Enlightened businesses are studying such opportunities to determine if they
will lead to improved profitability. If so, they shall decide to release the expanded service to all of their customers, thereby increasing profitability and also providing a closer attachment with current clients What is Happening in  financial cial Flow Management
Several trends and greatest practices are emerging for financial flows that shall help to streamline and make end-to-end electronic payments. These include:
Purchasing Cards and Distribution Cards
More and more businesses are installing Purchasing Cards (P-Cards) like a method of creating purchasing more efficient and cost-effective. P-Card processes also enable businesses to aggregate provide data quickly and frequently, and to maintain compliance with business provide policies They also increase financial transparency and help businesses adhere to regulations. The Distribution Card is drafted to re-engineer Distributors' and wholesalers' accounts receivable (A/R) process through the replacement of cash, customer credit and promissory notes. By shifting the manual-driven process and burden of invoicing and collections from the Distributor to Bank, the Distribution Card transforms the collection process into a quick paperless electronic payment, reducing accounts receivable (A/R) costs substantially. Sales proceeds should be immediately transferred into working capital for faster turnover.
EIPP (Electronic Invoice
Presentment & Payment)
Gradually, businesses are moving toward Electronic Invoice Presentment (EIP) and Electronic Invoice Presentment and Payment (EIPP). In a recent survey, 78 percent of respondents spoke about they were neither "very likely" or "somewhat likely" to transition from cardboard checks to electronic payments for their B2B payments within the next 3 years.2 Today's new EIPP tools give an great opportunity to perform financial flow and details flow tasks at the similar to time. The ability to send detailed invoice-level details (SKU numbers, quantities, PO numbers, etc.) along with remittances enables the supply chain to transfer this details quickly and without errors often located in
manual procedures.
Invoice Imaging
Some businesses are creating soft copy images of cardboard invoices such that all payments can proceed along an electronic, paperless pathway. Others are creating data warehouses to maintain line item detail, with details from a P-Card solution or other sources.
Supplier Web Portals for Invoice Inquiries
Another signifi cant trend is to develop Web-based automated inquiry processes for suppliers. Instead of accessing a call center to make a simple inquiry, suppliers can access a Web portal for their business and perform self-service inquiry regarding the status
of their invoices (received, in payables queue, in reconciliation queue, scheduled to be paid as of a sure date, etc.).
Web-based Financial Reporting
To reduce costs, significantly improve provide management, and make more informed business decisions, many businesses are finding that it's critical to electronically capture financial transaction and invoice-level data and then review it through a Web-based reporting tool. This transaction and invoice-level data should be with no problems integrated with
existing return office financial systems. Studies indicates that this integration capability can keep 1-4 days per month on manual data synthesis and reconciliation activities          
KPIs for Supply Chains
Product Supply Chain metrics have 3 key dimensions:
• Customer service is usually measured by percent Fill Rate or percent Done Order Rate in a build-to stock situation, or by percent On-time Delivery in a build-to-order case. Increasingly for build-to-stock situations, businesses are also measuring Product
Availability (percent time in stock) at retailers' shelves like a metric for customer service.
• Inventory (an Asset) is measured by value, by time supply (Days of Inventory), or by Inventory Turns (Turns = Cost of Products Sold (COGS)/Inventory Value). All 3 metrics are closely related. By knowing a firm's annual COGS, one can derive any
inventory metric from neither regarding the others.
• Velocity is often measured by the Cash-to-Cash (C2C) cycle (C2C = Inventory + A/R – A/P), all measured in days of supply.
A negative C2C cycle is attractive for growth. However, receiving the entire supply chain perspective, one's suppliers presumably grow to accustomed to delayed payment terms and locate other ways to manage profitability. Furthermore, one company's payables are another company's receivables, and within the supply chain view, these "cancel out" with one
another. However, the integration of automated payment solutions can lead to a significant reduction within the uncertainty of A/P and A/R flows, which can ultimately be barely valuable to entire chain KPIs for Financial Flows
Key Performance Indicators (KPIs) for financial flows with the following:
• Days of Working Capital (DWC) =
(Working Capital/Annual Revenue) x 365
• Days Sales Outstanding (DSO) =
(Accounts Receivable/Annual Revenue) x 365
• Days of Inventory (DIO) =
(Inventory Value/COGS) x 365
• Days Payables Outstanding (DPO) =
(Accounts Payable/Annual Revenue) x 365
Days of Working Capital should be with no problems converted into an equivalent metric, Working Capital as percent of Annual Sales. (For example, if a company's DWC is 50 days, then Working Capital like a percent of Annual Sales = 50/365 = 13.7 percent.)
Other important characteristics of financial flows are:
• Reliability of payment methods
• Predictability of payment inflows and outflows;
improving cash flow
• Details Management (invoice-level data with
financial data)
Key How Supply Chain & Financial Flow KPIs Connect for Greater Efficiencies
In many cases, financial flow KPIs can hold a direct, positive impact on supply chain management performance.
Impact on C2C
The financial flow KPIs of DIO, DSO, and DPO hold a direct correlation to C2C cycle supply chain metric. Improvements in supply chain creation and operation shall pay off in reduced inventory levels, thereby improving this metric. Additionally, modern
payment processes for example EIPP shall pay off in reductions in most A/R and A/P for businesses along the supply chain. Here, the benefit should be in reduced Working Capital needs.
Impact on Service
Expedited financial flows help a smooth-running supply chain. Conversely, if a delay in financial flows causes delays in fabric receipt, then customer service (fill rates, availability, on-time delivery) should be unexpectedly degraded.
Impact on Inventory
Financial flow processes associated with A/R should possibly affect the supply chain. There should be instances where unexpected delays in cash receipts force a business to delay ordering of incoming materials, due to Working Capital constraints. This should result in reduced customer service later on, when the absence regarding the missing fabrics is felt; it should result in higher stock outs, lower on-time deliveries, and decreased revenues.
Improvement opportunity for finance flows
Adopting automation solution for  financial clows for example Purchase card and distribution card and EIPP processes creates improvement opportunities and cost saving in multiple areas. More Efficient Purchase & Sales Processes
P-Cards have provided significant reductions in purchasing processing costs. Studies display a 50 to 60 percent reduction in A/P invoice processing from electronic systems.6 Another advantage of P-Cards is that they should be with no problems synchronized with company
expenditure policies. Merchant Category Codes should be used to direct purchases to vendors on a company's Approved Vendor List (AVL). There should be dollar
spending limits set on any single purchase, which can vary by individual. To improve sales and collections processes a seller shall receive settlement of funds as soon as the next day by accepting a P-Card and and/or a Distribution Card like a payment method.
Faster Reconciliation through Electronic
Invoice Presentment (EIP) and Payment (EIPP)
Electronic Reconciliation – A/P
Matching shipping receipts, invoices, and corresponding purchase orders was a manual process for A/P in many companies. It is not uncommon to have mismatch rates between 10 percent and 25 percent of all invoices received. The buyer typically informs
the seller regarding the mismatch and shall not make any partial payment on the invoice until the discrepancy is resolved. It shall seem that the buyer is gaining "fl oat"
or the use of Working Capital until resolution occurs, but since the cause is a document mismatch, there is no method the buyer can plan on that fl oat systematically.
Furthermore, from a supply chain viewpoint, the uncertainty associated together with the delay in invoice payment until resolution shall make difficulties for the seller. Electronic means of improving the three-way matching process are emerging. Businesses that have moved
in this direction shall typically perform the three-way match many earlier within the process. It is no detailed required to wait until the invoice is due; the match should be performed immediately subsequent to the fabric was received and a count performed. (Quality checks
can be done in parallel.) If a discrepancy is found, then there is ample time to correct it without delaying payment beyond normal terms, since the reconciliation was initiated many earlier within the process. Furthermore, modern EIPP processes can give sufficient invoice-level detail such that many mismatches should be quickly diagnosed together with the details provided electronically. This speeds up the reconciliation process
significantly and accomplishes it at many lower cost. Electronic Reconciliation – A/R
 
Electronic Reconciliation – A/R The similar to three-way match discussed above shall also be present on the A/R side. Businesses can with no problems have three-way match discrepancies on the A/R side of between 10 percent and 40 percent of invoices sent. It shall take up to 40 days to resolve the discrepancies. The business shall receive only a partial payment on their invoice during this period, and sometimes no payment at all, until the discrepancy is resolved With automated systems, reconciliation should be accomplished earlier, more easily, and faster. Modern e-payment processes can with detailed details for example P.O. number, Invoice number,
and sufficient invoice and P.O. line item details to resolve many mismatches without further manual effort. The result is significantly faster cash inflows (e.g., an improved Cash-to-Cash cycle) and reduced Days Sales Outstanding (DSO). Furthermore, automated
A/R processing can improve customer relationships Improved Flow of Information
Data Integration
Use of P-Cards allows businesses to obtain detailed data that is very helpful within the reconciliation process and should also be useful within the product supply chain.
While all card transactions contain "Level One" details (the minimum needed to clean and settle the financial transaction), modern processes let for "Level Two" and "Level Three" data capture and transaction reporting. In particular, Position 3 data
may with invoice-level details for example discount amount, freight/ship amount, order date, account number, item commodity code, item description, quantity, unit of measure, and unit cost.
Vendor Web Portals
A vendor Web portal allows vendors electronic access to a company's details records pertaining to their company, for example invoice status. Modern e-payment processes can contain sufficient detail to let many vendor inquiries to be handled by a self service vendor portal. This saves most buyer and seller time and expense; it reduces telephone calls to buyer and provides a faster response to seller.
Outsourcing Credit and Collections
Credit Limit Optimization
When setting appropriate credit limits for customers, a many different factors return into play, within account profitability and credit risk. Monitoring credit limits dynamically is difficult for businesses to accomplish by themselves. There exists economic
efficiencies in outsourcing the task of determining optimal credit limits and monitoring them dynamically. Not many businesses can claim their core competence is optimizing credit limits. This business function is an organic candidate for outsourcing to a financial institution. Such institutions have specialized staff to deal with assessment of credit risk, as well as standardized collection procedures. Due to economies of scale, they should be can give this function in a more cost-effective manner.
Receivables Financing
If a business or an sector has traditionally had lengthy payment terms (e.g., 90 days or more), the suppliers shall often should have their receivables financed. This is another opportunity for banks to give value.
Collections
Companies are also creating use of Distribution Card solutions to streamline their collections and reconciliation tasks.Selling should be more effective when banks manage collections duties.
Lower Working Capital Needs
Improved financial flow processing can contribute to reduced Working Capital through better visibility. More effective financial processing can help remove uncertainties in  financial flows and thereby contribute to a significant decrease within the Days of Working Capital (DWC). It was estimated that increased visibility into A/R can reduce working Capital wants by as many as 20-25 percent.7 One method to estimate the impact of better visibility is to draw a parallel between managing Working Capital and managing inventories. Safety stock in inventory processes is proportional to standard deviation regarding the demand forecast error. Improvements in supply chains can often lower the effective standard deviation of forecast error by 10-20 percent. Applying this logic to Working Capital, one should expect that improved visibility on most A/P and A/R should translate to reductions of 10-20 percent. One sector source forecasts that sophisticated cash-flow optimization tools shall appear by 2006-07, adding significant enhancements to current innovative payment capabilities
Strengthened Partner Relationships
Closer, Responsive Customer Connection
Automated processes to submit invoices and receive payments make it easier for clients to reconcile and pay invoices. The ability to send Advance Shipping Notices (ASNs) and to track customer orders (dynamic order status information) can further cement the relationship between a business and its customers. Differentiate by Adding Services (e.g., EIPP) When a business provides an things that is not with no problems differentiated (e.g., a commodity), it can use financial services to differentiate itself from competitors. If a
company uses EIPP, it is many easier for clients to do business with that business due to the fact that EIPP benefits accrue to most parties within the supply chain. If a buyer is considering 3 alternative sources of product, the business offering the EIPP benefi ts should be in an improved position to win the business.
What's Happening in
Financial Flow Management
Several trends and greatest practices are emerging for financial flows that shall help to streamline and make end-to-end electronic payments. These include:
Purchasing Cards and Distribution Cards
More and more businesses are installing Purchasing Cards (P-Cards) like a method of creating purchasing more efficient and cost-effective. P-Card processes also enable businesses to aggregate provide data quickly and frequently, and to maintain compliance with business provide policies They also increase financial transparency and help businesses adhere to regulations. The Distribution Card is drafted to re-engineer Distributors' and wholesalers' accounts receivable (A/R) process through the replacement of cash, customer credit and promissory notes. By shifting the manual-driven process and burden of invoicing and collections from the Distributor to Bank, the Distribution Card transforms the collection process into a quick paperless electronic payment, reducing accounts receivable (A/R) costs substantially. Sales proceeds should be immediately transferred into working capital for faster turnover.
EIPP (Electronic Invoice
Presentment & Payment)
Gradually, businesses are moving toward Electronic Invoice Presentment (EIP) and Electronic Invoice Presentment and Payment (EIPP). In a recent survey, 78 percent of respondents spoke about they were neither "very likely" or "somewhat likely" to transition from cardboard checks to electronic payments for their B2B payments within the next 3 years.2 Today's new EIPP tools give an great opportunity to perform financial flow and details flow tasks at the similar to time. The ability to send detailed invoice-level details (SKU numbers, quantities, PO numbers, etc.) along with remittances enables the supply chain to transfer this details quickly and without errors often located in
manual procedures.
Invoice Imaging
Some businesses are creating soft copy images of cardboard invoices such that all payments can proceed along an electronic, paperless pathway. Others are creating data warehouses to maintain line item detail, with details from a P-Card solution or other sources.
Supplier Web Portals for Invoice Inquiries
Another signifi cant trend is to develop Web-based automated inquiry processes for suppliers. Instead of accessing a call center to make a simple inquiry, suppliers can access a Web portal for their business and perform self-service inquiry regarding the status
of their invoices (received, in payables queue, in reconciliation queue, scheduled to be paid as of a sure date, etc.). Web-based Financial Reporting
To reduce costs, significantly improve provide management, and make more informed business decisions, many businesses are finding that it's critical to electronically capture financial transaction and invoice-level data and then review it through a Web-based reporting tool. This transaction and invoice-level data should be with no problems integrated with
existing return office financial systems. Studies indicates that this integration capability can keep 1-4 days per month on manual data synthesis and reconciliation activities          
KPIs for Supply Chains
Product Supply Chain metrics have 3 key dimensions:
• Customer service is usually measured by percent Fill Rate or percent Done Order Rate in a build-to stock situation, or by percent On-time Delivery in a build-to-order case. Increasingly for build-to-stock situations, businesses are also measuring Product
Availability (percent time in stock) at retailers' shelves like a metric for customer service.
• Inventory (an Asset) is measured by value, by time supply (Days of Inventory), or by Inventory Turns (Turns = Cost of Products Sold (COGS)/Inventory Value). All 3 metrics are closely related. By knowing a firm's annual COGS, one can derive any
inventory metric from neither regarding the others.
• Velocity is often measured by the Cash-to-Cash (C2C) cycle (C2C = Inventory + A/R – A/P), all measured in days of supply.
A negative C2C cycle is attractive for growth. However, receiving the entire supply chain perspective, one's suppliers presumably grow to accustomed to delayed payment terms and locate other ways to manage profitability. Furthermore, one company's payables are another company's receivables, and within the supply chain view, these "cancel out" with one
another. However, the integration of automated payment solutions can lead to a significant reduction within the uncertainty of A/P and A/R flows, which can ultimately be barely valuable to entire chain KPIs for Financial Flows
Key Performance Indicators (KPIs) for financial flows with the following:
• Days of Working Capital (DWC) =
(Working Capital/Annual Revenue) x 365
• Days Sales Outstanding (DSO) =
(Accounts Receivable/Annual Revenue) x 365
• Days of Inventory (DIO) =
(Inventory Value/COGS) x 365
• Days Payables Outstanding (DPO) =
(Accounts Payable/Annual Revenue) x 365
Days of Working Capital should be with no problems converted into an equivalent metric, Working Capital as percent of Annual Sales. (For example, if a company's DWC is 50 days, then Working Capital like a percent of Annual Sales = 50/365 = 13.7 percent.)
Other important characteristics of financial flows are:
• Reliability of payment methods
• Predictability of payment inflows and outflows;
improving cash flow
• Details Management (invoice-level data with
financial data)
Key How Supply Chain & Financial Flow KPIs Connect for Greater Efficiencies
In many cases, financial flow KPIs can hold a direct, positive impact on supply chain management performance.
Impact on C2C
The financial flow KPIs of DIO, DSO, and DPO hold a direct correlation to C2C cycle supply chain metric. Improvements in supply chain creation and operation shall pay off in reduced inventory levels, thereby improving this metric. Additionally, modern
payment processes for example EIPP shall pay off in reductions in most A/R and A/P for businesses along the supply chain. Here, the benefit should be in reduced Working Capital needs.
Impact on Service
Expedited financial flows help a smooth-running supply chain. Conversely, if a delay in financial flows causes delays in fabric receipt, then customer service (fill rates, availability, on-time delivery) should be unexpectedly degraded.
Impact on Inventory
Financial flow processes associated with A/R should possibly affect the supply chain. There should be instances where unexpected delays in cash receipts force a business to delay ordering of incoming materials, due to Working Capital constraints. This should result in reduced customer service later on, when the absence regarding the missing fabrics is felt; it should result in higher stock outs, lower on-time deliveries, and decreased revenues. Improvement opportunity for finance flows
Adopting automation solution for  financial clows for example Purchase card and distribution card and EIPP processes creates improvement opportunities and cost saving in multiple areas. More Efficient Purchase & Sales Processes
P-Cards have provided significant reductions in purchasing processing costs. Studies display a 50 to 60 percent reduction in A/P invoice processing from electronic systems.6 Another advantage of P-Cards is that they should be with no problems synchronized with company
expenditure policies. Merchant Category Codes should be used to direct purchases to vendors on a company's Approved Vendor List (AVL). There should be dollar
spending limits set on any single purchase, which can vary by individual. To improve sales and collections processes a seller shall receive settlement of funds as soon as the next day by accepting a P-Card and and/or a Distribution Card like a payment method.
Faster Reconciliation through Electronic
Invoice Presentment (EIP) and Payment (EIPP)
Electronic Reconciliation – A/P
Matching shipping receipts, invoices, and corresponding purchase orders was a manual process for A/P in many companies. It is not uncommon to have mismatch rates between 10 percent and 25 percent of all invoices received. The buyer typically informs
the seller regarding the mismatch and shall not make any partial payment on the invoice until the discrepancy is resolved. It shall seem that the buyer is gaining "fl oat"
or the use of Working Capital until resolution occurs, but since the cause is a document mismatch, there is no method the buyer can plan on that fl oat systematically.
Furthermore, from a supply chain viewpoint, the uncertainty associated together with the delay in invoice payment until resolution shall make difficulties for the seller. Electronic means of improving the three-way matching process are emerging. Businesses that have moved
in this direction shall typically perform the three-way match many earlier within the process. It is no detailed required to wait until the invoice is due; the match should be performed immediately subsequent to the fabric was received and a count performed. (Quality checks
can be done in parallel.) If a discrepancy is found, then there is ample time to correct it without delaying payment beyond normal terms, since the reconciliation was initiated many earlier within the process. Furthermore, modern EIPP processes can give sufficient invoice-level detail such that many mismatches should be quickly diagnosed together with the details provided electronically. This speeds up the reconciliation process
significantly and accomplishes it at many lower cost. Electronic Reconciliation – A/R
 
Electronic Reconciliation – A/R The similar to three-way match discussed above shall also be present on the A/R side. Businesses can with no problems have three-way match discrepancies on the A/R side of between 10 percent and 40 percent of invoices sent. It shall take up to 40 days to resolve the discrepancies. The business shall receive only a partial payment on their invoice during this period, and sometimes no payment at all, until the discrepancy is resolved With automated systems, reconciliation should be accomplished earlier, more easily, and faster. Modern e-payment processes can with detailed details for example P.O. number, Invoice number,
and sufficient invoice and P.O. line item details to resolve many mismatches without further manual effort. The result is significantly faster cash inflows (e.g., an improved Cash-to-Cash cycle) and reduced Days Sales Outstanding (DSO). Furthermore, automated
A/R processing can improve customer relationships Improved Flow of Information
Data Integration
Use of P-Cards allows businesses to obtain detailed data that is very helpful within the reconciliation process and should also be useful within the product supply chain.
While all card transactions contain "Level One" details (the minimum needed to clean and settle the financial transaction), modern processes let for "Level Two" and "Level Three" data capture and transaction reporting. In particular, Position 3 data
may with invoice-level details for example discount amount, freight/ship amount, order date, account number, item commodity code, item description, quantity, unit of measure, and unit cost.
Vendor Web Portals
A vendor Web portal allows vendors electronic access to a company's details records pertaining to their company, for example invoice status. Modern e-payment processes can contain sufficient detail to let many vendor inquiries to be handled by a self service vendor portal. This saves most buyer and seller time and expense; it reduces telephone calls to buyer and provides a faster response to seller.
Outsourcing Credit and Collections
Credit Limit Optimization
When setting appropriate credit limits for customers, a many different factors return into play, within account profitability and credit risk. Monitoring credit limits dynamically is difficult for businesses to accomplish by themselves. There exists economic
efficiencies in outsourcing the task of determining optimal credit limits and monitoring them dynamically. Not many businesses can claim their core competence is optimizing credit limits. This business function is an organic candidate for outsourcing to a financial institution. Such institutions have specialized staff to deal with assessment of credit risk, as well as standardized collection procedures. Due to economies of scale, they should be can give this function in a more cost-effective manner.
Receivables Financing
If a business or an sector has traditionally had lengthy payment terms (e.g., 90 days or more), the suppliers shall often should have their receivables financed. This is another opportunity for banks to give value.
Collections
Companies are also creating use of Distribution Card solutions to streamline their collections and reconciliation tasks.Selling should be more effective when banks manage collections duties.
Lower Working Capital Needs
Improved financial flow processing can contribute to reduced Working Capital through better visibility. More effective financial processing can help remove uncertainties in  financial flows and thereby contribute to a significant decrease within the Days of Working Capital (DWC). It was estimated that increased visibility into A/R can reduce working Capital wants by as many as 20-25 percent.7 One method to estimate the impact of better visibility is to draw a parallel between managing Working Capital and managing inventories. Safety stock in inventory processes is proportional to standard deviation regarding the demand forecast error. Improvements in supply chains can often lower the effective standard deviation of forecast error by 10-20 percent. Applying this logic to Working Capital, one should expect that improved visibility on most A/P and A/R should translate to reductions of 10-20 percent. One sector source forecasts that sophisticated cash-flow optimization tools shall appear by 2006-07, adding significant enhancements to current innovative payment capabilities
Strengthened Partner Relationships
Closer, Responsive Customer Connection
Automated processes to submit invoices and receive payments make it easier for clients to reconcile and pay invoices. The ability to send Advance Shipping Notices (ASNs) and to track customer orders (dynamic order status information) can further cement the relationship between a business and its customers. Differentiate by Adding Services (e.g., EIPP) When a business provides an things that is not with no problems differentiated (e.g., a commodity), it can use financial services to differentiate itself from competitors. If a
company uses EIPP, it is many easier for clients to do business with that business due to the fact that EIPP benefits accrue to most parties within the supply chain. If a buyer is considering 3 alternative sources of product, the business offering the EIPP benefi ts should be in an improved position to win the business.
Conclusions
The supply chain financial flow is at a critical threshold of evolution. Current trends in supply chain and financial flow management clearly favor the use of automated payment solutions. Continued expansion in this region offers high potential for:
• Reducing significantly purchasing processing costs • Accelerating payment and invoice reconciliation • Reducing collections costs significantly and minimizing the no. Days Sales Outstanding (DSO)
• Creating greater processing efficiencies within the procurement of goods
• Enhancing visibility, which means fewer uncertainty in accounts receivable (A/R) and accounts payable (A/P) and a reduction in Working Capital wants The different payment solutions presented in this document release businesses a powerful automated system that can eliminate financial flow challenges in today's supply chain. Based on an analysis of available supply chain performance data and measures of impact (as defined in this Visa Commercial Solutions Sector Briefing), it is likely to draw some generalizations regarding the economic efficiencies and benefits that should be gained by improving financial flows with different innovative payment solutions. Quantitatively speaking, a business with $1 billion annual revenue should obtain an annual savings of nearly $10 million, or almost one percent of revenues.10 This projected savings  represents higher than 20 percent of typical annual profits for such a company. For a median Fortune 500 company, the annual savings should be as high as $81million—eight times as muchi