Category Archives: Finance

Ariba and The Receivables Exchange – Shoring Up the Weakest Link

With credit remaining tight, there is still considerable liquidity risk throughout most supply chains. But there is something that can be done about it, and I’m glad to see that some vendors, like Ariba, are making it easy for buyers to help their suppliers. Even though traditional banks might not be very helpful in these troubled times, there are a lot of new, innovative, lenders out there that will happily do short term financing, for much more reasonable rates, with assurances that they will be (re)paid within a guaranteed timeframe. This means that if a buyer is willing to commit to payment in 30 days, a cash-crunched supplier can get much needed liquidity in as little as a single day.

In addition, as I indicated in my last post on The Receivables Exchange, the supplier can completely control the process. The supplier can define the minimum advance required, the maximum transaction fee it will pay (for a 30 day advance), preferred “buy it now” financing requirements, and the auction start time. If the request is reasonable, the receivable could be bought in 15 minutes and money wired to the supplier’s bank account the next day.

Furthermore, according to this recent article on “shoring up the weakest link” in Treasury & Risk, trades often happen in as little as 15 seconds and sale of a $1 Million receivable will often occur within 15 minutes. Sellers who cherry-pick their receivables from investment-grade customers often find that 85% will be bought at their buy-out price.

Furthermore, if the supplier happens to be on the Ariba network, the supplier can quickly shunt receivables with all of the necessary supporting documentation onto the Exchange, simplifying the process even further. Plus, they can do so after evaluating what discount the buyer has offered for early payment, allowing the supplier to make the best possible decision.

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Characteristics of Tax Efficient Supply Chain Management

One of the areas that doesn’t get enough attention in supply chain is taxation. Whether its because we think that taxes are unavoidable or we don’t know how to get rebates or avoid them in the first place, they are too often seen as a cost of business. While its true that taxes are more certain than death (as you don’t know when you’ll die but you know you’ll get taxed until you do, and then when you do), it’s also true that they can be minimized.

Last year, Supply & Demand Chain ran a great pair of articles on the tax efficient supply chain, that I covered in this post on the tax efficient supply chain. Since then, I haven’t seen much, until this article on how to benefit when the supply chain meets tax which presented ten characteristics of a tax efficient supply chain structure and ten leading practices of companies with tax efficient supply chains.

The practices, in particular, are worth pointing out:

  1. Implement limited risk structures following a business change.
    Having to make big transfers to cover losses can incur “transfer” taxes related to incoming revenue. Furthermore, if the unit or division the money is coming from is separate or in another country and profitable, you might still have to pay taxes on the “profits” in that business, division, or country and get taxed twice.
  2. Align the tax and transfer pricing structure with the locus of strategic decision making.
    If your operations aren’t in synch, the corrections you have to make after the fact could have tax implications.
  3. Focus resources on primary risks and view Advance Pricing Agreements (APAs) as key tools for minimizing the impact of tax audits.
    Good documentation is the key to a successful audit (as long as you have been truthful on your taxes).
  4. Document the business case for restructuring when the decision is being made.
    Be sure to detail compensation or indemnification payments to restructured entities, or risk being taxed and fined after the fact.
  5. Consider applying for an APA in one or more countries.
    This will protect you from double taxation in two or more tax jurisdictions.
  6. Be sure your documentation includes the responsibility profiles of limited risk entities.
    You don’t want your efforts to look like a tax evasion scheme. While it’s perfectly legal to take steps to minimize your tax burden, attempting to alleviate your fiscal responsibilities completely is a different story.
  7. Perform an annual review.
    Insure that you are documenting revenue and paying taxes consistent with all agreements and laws that are in place. Document the findings. If you ever need to show “reasonable care”, this is how you’ll do it.
  8. Establish procedures for tax authority audits.
    Be prepared and responsible. It will help.
  9. Keep informed of tax developments in each operating country.
    Being proactive will save you a lot more than if you are reactive.
  10. Talk to Peers and Experts.
    Talk with companies that have implemented Tax Efficient Supply Chains and expert consultancies (and global tax firms) that have helped.

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Supply Chain Finance: We’re NOT There Yet!

A recent article on the World Trade Magazine web site asked “are we there yet” in reference to Supply Chain Finance. To this, I must answer an emphatic NO!

Why?

First of all, thousands of business went out of business last year simply because customers, who obviously have no understanding of how financing should flow through the supply chain, wouldn’t pay on time and simply extended DPO as their method of “financing” themselves. (See They Killed Kenney.)

Secondly, as noted by Michael McKenzie of JPMC in the article, factoring is the “financing method” receiving the most attention. Factoring is not financing. It’s just a high-interest loan in reverse. “Here’s 80% of the value of your receivables.” How is that better than “here’s a 20% interest loan”? Think about it.

Thirdly, as noted by David Gustin of GBI, bank-assisted Trade Finance Products account for less than 15 percent of Trade Financing. Banks have all the money … and, generally speaking, they haven’t gotten it.

I could go on, but I don’t see the need because these three examples alone clearly demonstrate that supply chain finance, for the most part, is still far on the horizon.

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Just a Tiny Tax

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

In the September 24th New York Times, there’s an op-ed column advocating a “tiny tax” on foreign exchange transactions. The author, Phillipe Douste-Blazy, proposes a tax of one two-hundredth of one percent on foreign exchange transactions of the most-traded currencies. That small tax would raise $33 billion dollars per year. He proposes using it for global health improvement programs. The tax itself looks like a good idea to me, although there is a huge number of competing uses for the revenue. Just looking at global issues, there is of course also a need for money to address climate change. And each country involved has its own domestic needs. But let’s just look at the math for a minute.

He estimates global foreign exchange transactions to be 800 trillion US dollars per year. (That’s a U.S. trillion, one million million.). According to the World Trade Organization, total trade in goods and services was approximately 20 trillion dollars in 2008. That multiple–foreign exchange transactions are 40 times actual trade in goods and services– is in line with what I’ve seen in several places. Foreign exchange transactions dwarf international trade.

What do we traders get as a side benefit of this huge market? We get a very transparent market and really small costs to exchange money. This is a good deal. How much would a transaction tax reduce transaction volume? I don’t know, but even if it reduced it 50%, actual international trade would still be tiny compared to financial trade. We’d still get a benefit. And humanitarian projects around the world need the money.

Dick Locke, Global Procurement Group and Global Supply Training.

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Is China Starting to Clean Up its Act?

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

There’s an interesting discussion going on over on Spend Matters about whether or not China is manipulating its currency. Well, I think it’s interesting because I’m participating. I don’t believe pegging a currency to the US dollar meets a normal definition of “currency manipulation.” Your mileage may vary, of course. The discussion can be found in last Friday’s Rant on Spend Matters (Should We Rethink Free Trade).

One of the other participants brought up the issue of China’s poor environmental standards. That’s true, as has been true of all developing countries. Back in the late 60s, Tokyo was one of the more polluted cities on earth. Traffic police wore oxygen masks. Electronic signs in Ueno and other places posted the CO and CO2 levels in the air. By the mid 80s the place was pristine. No outside pressure was brought to bear. The Japanese just got fed up and fixed the problem. It usually takes some degree of economic development before this starts to happen.

I’ve always hoped the same thing would happen in China. It looks like it’s starting to happen. I’m glad, because China is too big for the environment to continue to accept their volume of pollution. Most importantly, it’s happening because of internal Chinese policies, not foreign pressure. Thomas Friedman has a column in today’s New York Times titled “The New Sputnik“. It’s about Red China becoming Green China. (You can read the opinion for yourself.) Friedman is less than totally optimistic, saying pollution is going to continue in parallel with development with solar and wind industries. He also points out that the US seems to be missing this market and most solar cells are coming from China already.

Dick Locke, Global Procurement Group and Global Supply Training.