01 Mar 2011 When accountants get in the way of the money
There is a perfectly good way of helping business thrive in challenging times – if only the accountants would get out of the way.
OK, that’s a little unfair but it is true that the accounting treatment of some supply chain finance arrangements are is presenting an obstacle to their successful implementation. Reverse factoring is a case in point.
Reverse factoring is one of those arrangements that, although very simple in principle, can be a little difficult to explain. The arrangement works a little like factoring whereby a supplier sells its invoices to a bank in order to get fast payment. With reverse factoring, the supplier approves the invoices for payment first. This allows the bank to offer favorable terms based on the buyers credit rating rather than the suppliers.
The days illustrated in the diagram above are examples only. The supplier could just as easily be paid in 30 days while the buyer settles in 60 or 90 days. What’s not to like about this? A buying organization can extend their DPO and manage their cash flow better without beating their supplier up. And when interest rates are low and funding for smaller companies still difficult to secure it eases supply chain finance headaches.
So what’s the problem? According to the Association of Corporate Treasurers (ACT), accounting requirements are acting as a major hindrance to the implementation of such “Buyer Driven Receivables Programmes”, (BDRPs). In a recent blog article they report that:
- Suppliers are nervous that the funding bank or the buyer may withdraw the funding for a BDRP at short notice – thus leaving the supplier in a pickle. If the buyer guarantees that the arrangement will be available for a minimum period it seems that this risks re-classification of trade creditors as debt
- If buyers actively promote the value of a BDRP to suppliers and / or extract benefit from the programme the trade creditor risks re classification as debt
- The buyer cannot be a party to the arrangements between the investor and the supplier without risk of reclassification of trade creditors as debt.
We run the risk of being too clever by half by wrapping our solutions up in ever more complex packaging to get around archaic conventions. Hybrid financial instruments have, (quite rightly in my view) got a bad name recently so let’s learn a lesson from recent history and keep it simple. If the accounting convention is getting in the way – get rid of the convention.
Supply chain finance can oil the wheels of industry the way the banks should but, for whatever reason, don’t. In difficult economic conditions, it allows business to continue to operate by leveraging the strength of the powerful at the same time as protecting the weak. It can preserve jobs and sustain industries. Accounting conventions should not be allowed to get in the way of that.