In my talk at Coupa Inspire this week exploring Procurement Game Changers, one of the core topics that I’ll be exploring is the importance for procurement to “follow the money” rather than just keeping their eyes on goods and supply (e.g., services) that they’re purchasing and managing the effective delivery/provision for the business. The financial supply chain, as I often call it, can be an opaque and murky thing for those not accustomed to looking at the flow of dollars between organizations, banks, third parties, and their suppliers. Once someone in procurement begins to dissect it within a company, they’ll often be shocked to see how inefficiently cash moves throughout the world (and the cost associated with transactions once they cascade across multiple tiers).
As my Trade Financing Matters colleague David Gustin likes to point out, cash flows around the world just like goods. In global sourcing activities in the past two decades, we solved the mystery of how best to get goods from an emerging economy into the West (or vice versa) but we’ve not yet cracked the flow of money. Nor have lenders for that matter, when it comes to global trade.
David reckons that trade finance is a large, global, and interconnected industry, encompassing nearly $8 trillion in credit yet. Most of trade credit (~$7.5 trillion) is not intermediated directly and remains on corporate balance sheets (in the form of trade receivables). In other words, unlike the financing of capital investments, acquisitions, or even corporate travel (e.g., through card programs), financial institutions have not yet cracked the code on how to intermediate the flow of cash from business to business.
As David observes, banks are the main third-party source of financing for corporate trade, but they intermediate only $500 billion of trade credit (roughly 12 percent of it). He also notes that insurers are the second largest intermediary ($150 billion), and offer several risk-related services to corporations, banks, and brokers. Yet the vast majority of trade (i.e., buyers buying from suppliers and suppliers selling to buyers) remains on company balance sheets and P&Ls as assets and liabilities until an eventual payment. This, of course, represents a huge opportunity for technology and supplier network providers alike to intermediate trade and move cash around faster and more transparently – but at a cost of course.
Stay tuned as I continue to preview the highlights from my talk at Coupa Inspire. Spend Matters readers can register here for the event and get a discount for attending by using the code INSPIRESM.