Financial and supply chain management: a practical operating map

Financial and supply chain management connects the commercial events of buying and selling with their financial consequences: orders, invoices, approvals, payments and cash. Financial supply chain management, or FSCM, is the broader discipline for managing connected financial and information flows across those activities. Supply chain finance is a narrower, short-term financing arrangement that can change the timing of payment on an approved invoice.

Ivalua describes FSCM as an interconnected approach spanning procure-to-pay, order-to-cash and working-capital management. SAP describes its FSCM offering as managing financial and information flows within a company and between business partners.

A practical map: three connected layers

Separating the layers helps distinguish the routine management of trade-related financial flows from a financing programme.

1. Operating events: orders, purchases or sales, delivery or performance, invoices, invoice approval, settlement and payment. These events create or resolve amounts owed between trading partners.
2. FSCM processes: the connected management of procure-to-pay, order-to-cash and working capital. SAP’s FSCM offering also includes areas covering cash and liquidity, credit, collections, disputes, bank relationships, treasury and risk management.
3. Financing choices: arrangements that alter the timing of cash flows. Supply chain finance sits in this layer.

Use procure-to-pay and order-to-cash as the organising view

Procure-to-pay, order-to-cash and working-capital management are the core cycles identified in Ivalua’s description of FSCM. A transaction map can follow an order through fulfilment, invoicing, approval and settlement, while recording the related cash payment or receipt.

Transaction-mapping checklist

• Identify the order, purchase or sale that begins the transaction.
• Link the delivery or performance record, invoice and approval status.
• Record the contractual due date and whether the invoice is settled, disputed or subject to collection activity.
• Connect each payable or receivable to the expected cash movement.
• Keep any financing arrangement separate from the underlying commercial payment terms.

This view places disputes, collections, credit and liquidity alongside the transaction events that affect them. The division of responsibilities will differ by organisation; SAP’s listed areas describe its own product scope rather than a universal operating model.

Where supply chain finance fits

Supply chain finance, also called supplier finance or reverse factoring in the buyer-led form, provides short-term credit around an approved supplier invoice. The buyer approves the invoice for financing by a bank or other outside financier. The supplier may then receive payment earlier at a discount, while the buyer pays on a later agreed date.

Investopedia says the model works best when the buyer has a stronger credit rating than the supplier and can obtain capital at a lower cost. That condition describes the model’s potential funding advantage; it does not establish that an arrangement is suitable for every buyer, supplier or invoice.

Approved-invoice timing example

In Investopedia’s example, a buyer purchases goods under 30-day terms and approves the supplier’s invoice. The supplier requests early payment from an affiliated financial institution and accepts a discount.

1. Under the original terms, the supplier would be paid on day 30.
2. The financier pays the supplier before day 30, less the agreed discount.
3. The financier extends the buyer’s payment period by a further 30 days.
4. The buyer pays the financier on day 60, while the supplier has received cash earlier.

The approved invoice is the link between the commercial transaction and the financing arrangement. FSCM remains the wider framework for following financial and information flows across procure-to-pay, order-to-cash and related functions; supply chain finance is one mechanism for changing payment timing.

A short implementation checklist

• Map the transaction from order through invoice, approval, settlement and cash movement.
• Include the status of invoices that are disputed, in collection or awaiting approval.
• Identify the cash, credit, collection and dispute processes that touch the transaction.
• For a supply chain finance programme, distinguish the invoice approval process from the supplier’s option to seek early payment.
• Document the financier, supplier discount and buyer payment date for any approved-invoice arrangement.

Frequently asked questions

What is the difference between financial supply chain management and supply chain finance?

Financial supply chain management is the broader management of connected financial and information flows across activities including procure-to-pay, order-to-cash and working-capital management. Supply chain finance is a narrower short-term financing arrangement in which an outside financier may pay a supplier early on an approved invoice, while the buyer pays later.

How does supply chain finance change payment timing for buyers and suppliers?

After a buyer approves an invoice, a supplier may receive early payment from a bank or other financier at a discount. The buyer pays the financier on a later agreed date. In Investopedia’s example, a 30-day payment term becomes a total 60-day period for the buyer after a further 30-day extension.

Sources

• Financial Supply Chain Management - SAP Help Portal — help.sap.com
• What is Financial Supply Chain Management? - Ivalua — www.ivalua.com
• Financial Supply Chain Management — supplychainmanagementedu.org
• Supply Chain Finance: What It Is, How It Works, Example - Investopedia — www.investopedia.com