Driving Efficiency through your Cash Conversion Cycle


Abu Dhabi, 13 October 2016
As the region takes a more cautious approach in times of declining oil revenues managing liquidity and cash conversion cycles (CCC) becomes an even more critical strategic objective for companies. The cash conversion cycle of a company is one of the key indicators of the liquidity required by a company to manage its day to day business. It starts at the time the payment for raw materials is made and ends when the proceeds of the sales are received. Along the way, there are a number of variables that come into play, including the payment period offered by the company’s supplier, the transit period, the inventory holding period for raw materials and finished goods, the time taken for the conversion of the goods, any credit period offered to the end buyers and the efficiency with which the collections are implemented. Whilst a number of these items are not directly within the control of the Treasurer and are often impacted by systems and policies deeply embedded within the operating environment of the corporates, Treasurers can still explore and look to work with financial institutions to identify options that are mostly financial by nature to reduce the company’s cash conversion cycle.

Receivables Financing
The receivables from a balance sheet perspective are a dual concern for the treasurer. They not only present a delay in cash, but also expose the corporate to credit risk. Some companies have a risk management function working in partnership with the treasury team and the sales department to ensure that the company assumes reasonable credit risk, establishes suitable policies and also works with key partners, i.e. banks and insurance companies, to develop risk mitigation solutions. For the cash that is trapped in the receivables, the obvious solution would be to sell everything on a cash basis. However, this would be contrary to market practice. Instead, financial institutions like NBAD for instance work with treasurers to look at options that allow companies to offer reasonable credit terms while also releasing the cash blocked and mitigating the credit risk.

Setting up a receivables financing program helps companies meet these objectives. The type of receivables financing programme would be determined by the terms of the underlying sales documentation. The ability of the company to assign the receivable as evidenced by the underlying contract is of critical importance to the structure of the receivable financing. Many of the underlying sales agreements have specific conditions relative to the ability of the company to assign its receivables. The location of the buyer, seller and performance of the contract also impact the structure of the assignment since they determine the appropriate governing laws and jurisdiction of the assignment.

Visibility is key
As Treasurers focus on improving their companies’ cash conversion cycles, it is critical that they also have complete visibility over their cash positions, control over cash balances with accurate and timely information provided by their banks. An understanding of where cash is vital to enable it to be deployed effectively. Cash flow forecasting is a key component with treasurers aiming at accurate forecasting of future demands on corporate funds, managing receivables and greater control of the payments process. All these are essential tools as they will predict if the business will have enough cash to support the operations or other planned activities, such as business expansion, for instance. Banks are in a position to offer multiple collection methods to suit business requirements; however the requirement for quick and immediate use of these funds is increasingly becoming the treasurers’ top priority with supporting tools to provide visibility and access to the funds.

All in all, a detailed legal review of the underlying sales documentation is required. It is always helpful if the potential requirements for receivables financing are kept in mind when the commercial contracts are being discussed. Consideration should be given to some of the variables in play when setting up the programs. They include the value of each transaction. If each transaction is of the size and nature that each can be purchased separately by a bank, this would entail a credit assessment on the buyer by the bank. Typically 80-90% of the receivables’ value is purchased by the bank to keep the supplier engaged in the transaction. These sales can be done on a disclosed or undisclosed basis to the buyer. The financing agreement also contains limited terms on which the bank has recourse to the corporate seller. Those are usually limited to: breach of representations and warranties, commercial disputes and charge backs, and failure of the assignment for undisclosed programs.

Supply Chain Financing: a growing liquidity tool in the Middle East
In addition to receivables financing, companies can also consider supply chain finance (SCF). SCF deals with the purchase side of the cash conversion cycle of the company. The company looks to increase the supplier credit period. A SCF arrangement provides a solution where the payables can be extended by the company. However, the supplier would receive the cash upfront rather than having to wait until the end of the credit period. Typically, these arrangements are most beneficial to large buyers who have a substantially stronger credit profile compared to their suppliers. This has the added benefit of credit assessment and the pricing being driven by the larger buyer’s standing in the market. The buyer benefits from a healthier and more solid supplier community, thereby securing and strengthening its whole supply chain.

SCF programs are typically structured to minimize the disruptions to the physical supply chain. These programs are highly automated and provide straight through processing to drive operational efficiencies. SCF is well established globally but remains relatively new in the MENA region with only a few of the international banks offering fully automated SCF programmes. NBAD has recently launched and become the first UAE bank to offer SCF. With its additional advantage of having a platform based in the region, NBAD can customize SCF to the specific commercial conditions of the Middle East.

Banks continuously see a strong push towards the automation of payments and payment standardisation, both from a corporate and a regulator’s perspective. They need to constantly invest in systems to keep up with the ever-changing demands from clients and the market. These investments are now targeted at fully linking the supply chain ecosystem by ensuring the entire process is fully automated end-to-end.

This helps drive greater efficiencies by reducing manual intervention/processes, thus reducing errors, and saves direct and indirect costs. Whether processing payments through different banks’ platforms, there are many benefits to be achieved.

In summary, receivables financing and supply chain financing offer good alternatives to meet the objectives of managing a tight cash conversion cycle. Both solutions continue to evolve and are becoming more and more mainstream in the market.


Sonam Kapadia
NBAD Head of Corporate Trade Sales & Advisory MENA

Sherie Morais
NBAD Head of Cash Management Sales & Advisory

Treasurers' Breakfast Roundtable

For more information on trade finance instruments, please read our latest Treasurers' Breakfast Roundtable report.