What Are the Key Terms and Concepts in Supply Chain Finance?

Here are some key terms and concepts in supply chain finance (SCF):

• Accounts Payable (AP)/Payables: Money owed by a buyer to its suppliers, recorded as a liability on the buyer's balance sheet
• Accounts Receivable (AR)/Receivables: Money owed by a buyer to a supplier for goods or services provided, typically recorded as an asset on the supplier's balance sheet
• Advance/Early Payment: Payment made before the invoice due date
• Balance Sheet: A financial statement that lists a company’s assets/liabilities, equity, and income/expenses
• Buyer: The company purchasing goods/services from suppliers
• Obligor: The person or business contractually obligated to make payment
• Off-Balance Sheet: Financing not recorded as a liability on the balance sheet, allowing for better financial ratios
• Payables Finance: A method of financing that allows buyers to pay their suppliers earlier by accepting discounts from suppliers
• Cash Conversion Cycle: The time it takes for a company to convert its investments in inventory and accounts receivable into cash flows from sales
• DIO, DPO, DSO: Days Inventory Outstanding (DIO), Days Payable Outstanding (DPO), and Days Sales Outstanding (DSO) are key metrics that measure the efficiency of a company's cash flow management. DIO indicates the average number of days inventory is held before sale, DPO reflects the average number of days a company takes to pay its suppliers, and DSO represents the average number of days it takes to collect payment after a sale. Together, they provide insight into how well a company manages its inventory, payments, and receivables.
• Dynamic Discounting: A flexible discount structure that allows suppliers to receive early payment in exchange for a discount on the invoice amount
• Early Payment Program: A program where buyers offer discounts to suppliers for early invoice payments, often facilitated through an online platform
• Extended Payment Terms: Lengthened periods before payment is due, such as extending terms from Net 30 to Net 90
• Funder: The entity providing capital in SCF programs, which can include banks or fintech companies
• Invoice: A document detailing the goods or services provided, the amount due, and the payment terms
• Supplier Financing: A financing solution that allows suppliers to receive early payments based on the buyer's creditworthiness rather than their own
• Working Capital Management: The process of managing short-term assets and liabilities to ensure sufficient liquidity for day-to-day operations
• Supply Chain Financing Platforms: Digital platforms that connect buyers, suppliers, and financiers, streamlining SCF processes and improving transparency