Many CFOs, treasurers and other executives we speak with ask us the question “is SCF worth the effort to my company?” This is a basic question, and whenever we’re asked that, we usually provide an in-depth benefits analysis, based on the buyer’s financials. On this post, we’ll try to get a grasp on how does an SCF program’s ROI could be calculated.
The benefits SCF provides buyers are detailed on one of our previous posts. In brief, they are:
1. Working capital boost (by way of payment terms extension)
2. Ebitda boost (by way of rebates)
3. Vendor-relations boost.
4. Supply-chain risk decrease.
As a reminder, this is how an ROI is calculated (taken from Investopidia):
Let’s try to quantify the SCF proceeds (working capital-related, Ebitda-related), and costs.
A few comments about the calculation below:
· Benefits 1 and 2 from above: we use the ‘AP’ (Accounts Payable) metric, not the ‘annual procurement volume’ one. Although the calculation can be done using both metrics, the AP one is the simpler.
· Benefits 3 and 4 are difficult to quantify. To keep this post simple, for the ROI calculation we would ignore them, despite the fact they provide real tangible value to buyers.
· To make things further simple, we use two exemplary buyers, one with AP of $100M, the other, with AP of $165M.
Quantifying the working capital impact
This is achieved via a four-step calculation:
1. Identify the vendors SCF may help re-negotiate longer terms. Estimate the expected result.
Most probably, not all vendors would be flexible to the same extent. Your procurement staff would probably be able to identify 2–3 groups. Let’s assume 4 vendors would move from 30 to 60 days, and 6 vendors would move from 30 to 75.
2. Calculate the AP volume that’s attributed to those two groups, out of the entire AP volume. In the example below, the latter is $100M, and the formers are as follows:
3. Calculate the AP change that would apply for each group, once terms are extended. The following formula would prove to be handy:
In our case, the green group’s DPO is x2, and the brown one’s is x2.5:
4. Factor it back into the equation to find out your AP volume after the move.
An AP boost of $32.5M translates into a working capital boost of $32.5M.
Calculating how does a $32.5M working capital boost translates into the buyer’s bottom line is company-specific and technical, so we will not get into it on this post.
Beyond a bottom line increase, this working capital boost also reduces the buyer’s (strategic) dependency on creditors and other stakeholders.
Quantify the Ebitda Impact
Let’s use a similar method to calculate the Ebitda impact, using another company as a test case.
- Identify the vendors that would probably be interested in having early payment of invoices as an option (no terms extension attached). Let’s assume 9 vendors with existing terms of 60 days on-boarded, and 16 vendors of 90 days terms did so too:
2. Identify the AP volume these vendors account for today.
3. Typical annualized rebate ratios for a buyer are 1%-4% apr. Typical utilization / usage rate of vendors that have chosen to on-board is 70% (0.7). From here, the calculation is quite straightforward:
4. Sum it up. In this case, expected rebate income is $0.6M-$2.5M. Remember — this is without the buyer paying any of its vendors a day too early!
Quantify the SCF Cost
On one of our previous posts, we’ve presented in detail the resources a buyer has to commit to launch an SCF program with Quartix. Here’s the short version:
The buyer incurs no direct cost. The only cost involved is indirect — time.
From our experience, here’s the time invested by a buyer to launch with Quartix, over the course of the first 1–3 months:
· CFO / treasurer: 15–30 hours (review the agreement, oversee the process).
· IT: 10–30 hours (ERP integration, testing).
· Procurement / AP: 10–20 hours (identify vendors, intro them to Quartix, define the operational process that’s attached to the ERP integration).
Although we did not calculate an SCF program’s ROI per se, we did demonstrate how to size the main building blocks needed for the calculation — the working capital boost a company can gain from SCF, the rebate income that’s created, and the direct / indirect resources that are needed to launch.
This knowledge may enable a buyer to conduct its own analysis.
Another option is to contact us at email@example.com. Quartix has a lot of experience conducting benefits analysis to buyers, based on their specific financials / spend. In 1–2 weeks, you’d be able to know, in a quantified, detailed way, what are the expected impact an SCF program would have on your business, in order to support an informed decision.