Today organizations function in a very volatile and difficult environment. Organizations are strapped for liquidity. In order to increase the cash flow, organizations are now looking at their supply chain. Supply chain has a big impact on the cash flow and working capital of an organization. Over 70% of respondents to a recent Aberdeen Group survey said their companies view working capital optimization as high priority.

So what is supply chain finance (SCF)?

According to PWC report, “SCF is a balanced approach for enhancing working capital for both buyers and sellers in a transaction—using an intermediary tool to link buyers, sellers, and third-party financing entities—thereby reducing supply chain risks/costs and strengthening business relationships.” Simply put, it refers to tools or solutions, techniques that link all the parties in supply chain – buyers, suppliers and financers (bank etc.) to optimize the business cash flow, reduce supply chain risk and build lasting business relationships.

Another way of looking at SCF is “tools, techniques and products that help businesses optimize their cash flow by managing payments to suppliers and receipts from customers”. These techniques can be as simple as extending payment terms to suppliers or demanding cash on delivery from a customer. as quoted by Purchasing Insight.

45% of participants in the Aberdeen Group’s study report that SCF technology has helped to drive their competitive advantage.

Traditionally, the payment arrangement was skewed towards buyer or supplier with the buyer attempting to defer payment/reduce payment size or the supplier attempting to accelerate cash collection. As per PWC, simply shifting the burden from one party to the other can add significant risk to the supply chain, including customer loss, business continuity risk, supplier viability risk, material cost inflation, deteriorating support, and a host of other issues.

Supply chain finance provides an opportunity to collaborate and create benefits for each side of the business transaction.