Working Capital and Supply Chain Management Glossary

Invoice Approval is the process of verifying and authorizing a supplier's invoice before payment, ensuring that the goods or services were actually received and the charges are correct. This payment authorization step serves as a critical control point that prevents incorrect payments and confirms that the company received what it paid for. In supply chain finance programs, invoice approval becomes even more important because it's the trigger that makes early payment options available to suppliers—meaning delays in approval can directly impact how quickly suppliers can access financing.

Liquidity Risk is the possibility that a company won't have enough readily available cash to meet its immediate financial obligations, such as paying suppliers, employees, or loan payments when they're due. This cash availability risk occurs when a company's assets are tied up in forms that can't be quickly converted to cash, even if the business is profitable on paper. Understanding liquidity risk is crucial for anyone involved in finance or operations, as it directly impacts a company's ability to function day-to-day and can threaten business survival even when underlying operations are healthy.

Trade Finance is a broad category of financial products and services that help businesses fund and manage the risks associated with buying and selling goods, both domestically and internationally. These commercial financing solutions bridge the gap between when companies need to pay for goods and when they receive payment from their customers, making it possible for businesses to trade with partners around the world even when they don't have enough cash upfront. Understanding trade finance is essential for anyone working in procurement, operations, or finance, as these tools enable the global commerce that drives modern business operations.

Receivables Finance is a broad category of financial solutions that enables businesses to access cash immediately by using their outstanding invoices (accounts receivable) as the basis for financing, rather than waiting for customers to pay according to standard payment terms. This invoice-based funding encompasses various approaches including factoring, invoice discounting, reverse factoring, and supply chain finance programs that convert future cash flows into immediate working capital. Understanding receivables finance is essential for finance professionals because these solutions provide flexible alternatives to traditional bank loans while helping businesses manage cash flow timing mismatches between paying expenses and collecting revenue.

A Settlement Date is the specific date when the buyer in a supply chain finance program pays the full invoice amount to the funding provider, completing the financing cycle that began when the supplier received early payment. This payment settlement date typically aligns with the original invoice payment terms (such as Net 60 days from invoice approval) and represents the buyer's obligation to honor their commitment regardless of whether suppliers chose early payment options. Understanding settlement dates is essential for treasury and finance staff because these dates determine cash flow requirements and must be carefully managed within broader financial planning to ensure sufficient funds are available when payments come due.

Off-Balance Sheet Financing refers to financial arrangements that allow companies to access capital or improve cash flow without recording the associated obligations as debt on their balance sheet. In supply chain finance, this accounting treatment occurs when suppliers sell their receivables to funders rather than borrowing against them, enabling improved financial ratios and enhanced borrowing capacity without increasing reported debt levels. Understanding off-balance sheet financing is crucial for organizations seeking to optimize their financial statements while accessing working capital solutions that support business growth and operational efficiency.

Supplier Participation Rate is a key performance metric that measures the percentage of eligible suppliers who actively use a supply chain finance program within a specified time period. This vendor adoption rate serves as a critical indicator of program success, reflecting the effectiveness of supplier onboarding, communication strategies, and the financial attractiveness of early payment options. Understanding and optimizing supplier participation rates is essential for maximizing the value and return on investment of supply chain finance initiatives while ensuring that program benefits reach the intended supplier base.

Working Capital is the money a company has available for its day-to-day operations, calculated by subtracting what the company owes in the short term from what it owns that can quickly be turned into cash. This operational funding represents the financial cushion that keeps businesses running smoothly, paying suppliers, covering payroll, and managing unexpected expenses. Understanding working capital is essential for anyone involved in finance, procurement, or operations, as it directly impacts a company's ability to operate effectively and grow sustainably.

Reverse Factoring is a financing arrangement where a buyer helps their suppliers get paid early through a third-party funder, like a bank or financial institution. Instead of suppliers waiting 30, 60, or 90 days for payment, they can receive money much sooner—often within just a few days—while the buyer still pays according to their original schedule. This payables finance solution creates a win-win situation that improves cash flow for suppliers without disrupting the buyer's payment timing, making it one of the most popular tools in modern supply chain finance.

Dynamic Discounting is an early payment program where companies use their own cash to pay suppliers ahead of schedule in exchange for a discount that changes based on how early the payment is made. Unlike traditional fixed discounts (like "2% off if paid in 10 days"), dynamic discounting offers a sliding scale where the earlier you pay, the bigger the discount you receive. This variable discounting approach helps companies earn returns on their excess cash while providing suppliers with flexible access to faster payments when they need them most.

Payment Terms Extension is the practice of negotiating longer timeframes for paying supplier invoices, typically moving from shorter periods like Net 30 days to longer periods such as Net 60, 90, or even 120 days. This extended payment arrangement allows buyers to retain cash for longer periods, improving their working capital position and providing more flexibility for business operations. When combined with supply chain finance solutions, payment terms extension becomes a strategic tool that benefits both buyers and suppliers by enabling longer payment periods while providing suppliers with early payment options through third-party funding.

Supplier Onboarding is the process of enrolling new vendors into a company's systems and programs, including supply chain finance initiatives. This vendor enrollment process involves collecting necessary documentation, verifying supplier credentials, setting up system access, and providing training on how to use available programs and platforms. Effective supplier onboarding is crucial for supply chain finance success because it directly impacts how quickly and willingly suppliers participate in early payment programs, making the difference between a program that delivers strong results and one that struggles to gain adoption.

SCF Utilization is a key performance metric that measures the percentage of eligible invoices that suppliers actually choose to finance through a supply chain finance program. This program usage rate serves as a critical indicator of program effectiveness, reflecting how well the financing options meet supplier needs and how successfully the program has been designed and implemented. Understanding SCF utilization is essential for program managers and finance teams because low utilization rates often signal opportunities for improvement in program design, supplier education, or operational processes that could unlock significant additional value for all participants.

A Funding Window is the specific timeframe during which suppliers can request early payment on their approved invoices through a supply chain finance program. This financing timeframe determines when early payment options become available (typically after invoice approval) and when they expire (usually some time before the original payment due date). Understanding funding windows is crucial for both suppliers and program administrators because the timing and duration of these payment windows directly impact how useful and attractive early payment programs are to suppliers who need flexible access to cash flow acceleration.

ERP Integration is the technical connection between a company's Enterprise Resource Planning (ERP) system and external platforms such as supply chain finance solutions, enabling automatic data sharing and process coordination between different business systems. This system connectivity eliminates the need for manual data entry, reduces errors, and ensures that information flows seamlessly between procurement, accounts payable, and financing platforms. Understanding ERP integration is essential for finance and operations staff because it determines how efficiently supply chain finance programs can operate and how much administrative work is required to manage these initiatives.

Payment at Shipment is a financing arrangement where suppliers receive payment for their goods immediately when they ship the products, rather than waiting for delivery confirmation, invoice approval, or standard payment terms to expire. This shipment-based financing approach provides suppliers with immediate cash flow upon dispatch while enabling buyers to maintain their preferred payment timing through third-party funding or structured payment arrangements. Understanding payment at shipment is particularly important for international trade and long lead-time supply chains where goods may spend weeks or months in transit before reaching their final destination.

Invoice Matching is the critical verification process that ensures an invoice accurately reflects goods or services that were actually ordered and received by comparing three key documents: the purchase order, delivery receipt, and supplier invoice. This document verification process, commonly known as three-way matching, serves as a fundamental control mechanism that prevents payment errors, fraud, and disputes while ensuring companies only pay for what they actually ordered and received. Understanding invoice matching is essential for finance and operations staff because it forms the foundation for accurate payment processing and, in supply chain finance programs, determines when invoices become eligible for early payment options.

Buyer Creditworthiness refers to the financial strength and payment reliability of the purchasing organization in a supply chain finance arrangement, representing the primary factor that determines program availability, financing rates, and capacity limits. This credit assessment measures the buyer's ability to meet payment obligations reliably, as most supply chain finance programs depend on the buyer's commitment to pay the full invoice amount on the original due date. Understanding buyer creditworthiness is crucial for finance professionals because it directly impacts supplier access to financing, program pricing, and the overall viability of supply chain finance initiatives.

Working Capital, also known as net working capital, represents the difference between a company's current assets and current liabilities. This fundamental financial metric measures a business's operational liquidity and short-term financial health. Effective working capital management is essential for ensuring a company can meet its day-to-day operational expenses and short-term obligations while maintaining the flexibility to invest in growth opportunities.

Procure-to-Pay (P2P) is the comprehensive business process that encompasses all activities from the initial identification of a purchasing need through the final payment to suppliers. This end-to-end procurement cycle integrates purchasing, receiving, accounts payable, and payment functions into a streamlined workflow that ensures efficient acquisition of goods and services while maintaining proper financial controls. Understanding the P2P process is essential for optimizing working capital management, as it creates the foundation for supply chain finance integration and establishes the operational framework for strategic payment timing and supplier relationship management.

Reverse Factoring, also known as Supply Chain Finance (SCF) or payables finance, is a financial solution that optimizes cash flow for both buyers and suppliers in a trade relationship. This buyer-initiated program enables suppliers to receive early payment on approved invoices through a third-party financial institution, while allowing the buyer to maintain or extend payment terms. As a cornerstone of modern working capital management, reverse factoring has gained significant traction among large corporations and their supply chains.

Dynamic Discounting is a financial arrangement that allows suppliers to receive early payment on their invoices in exchange for a discount that varies based on how early the payment is made. Unlike traditional static early payment discounts such as "2/10 net 30," dynamic discounting uses a sliding scale where the discount decreases as the payment date approaches the original due date. This flexible early payment discounting solution enables buyers to use their excess cash to generate returns while providing suppliers with greater control over their cash flow.

Working Capital, also known as net working capital, represents the difference between a company's current assets and current liabilities. This fundamental financial metric measures a business's operational liquidity and short-term financial health. Effective working capital management is essential for ensuring a company can meet its day-to-day operational expenses and short-term obligations while maintaining the flexibility to invest in growth opportunities.

A Funder in supply chain finance (SCF) is the financial institution or entity that provides the capital to facilitate early payments to suppliers in various trade finance programs. These third-party organizations—typically banks, specialized financial institutions, or fintechs—play a critical role in the SCF ecosystem by advancing payment to suppliers before the buyer's original payment due date, and subsequently collecting the full invoice amount from the buyer when payment is due. This intermediary position enables the funder to provide liquidity that strengthens supply chains while generating returns through fees or discount margins.

Invoice Approval is the formal business process by which a buyer verifies and authorizes payment for goods or services received from a supplier. This critical step confirms that the invoice is accurate, the goods or services have been properly delivered, and the purchase complies with organizational policies before payment authorization. In supply chain finance (SCF) programs, invoice approval serves as the gateway that enables suppliers to access early payment options, making it a fundamental component of modern working capital optimization strategies.

Supplier Onboarding is the systematic process of integrating new vendors into a company's procurement ecosystem, establishing the necessary documentation, compliance verification, and system connections required for effective business relationships. In supply chain finance (SCF) programs, supplier onboarding takes on additional significance as it includes enrolling suppliers in early payment platforms and ensuring they can effectively utilize financial tools to optimize their working capital. This comprehensive vendor onboarding process forms the foundation for successful long-term partnerships and enables access to strategic financing solutions.

An Early Payment Program is a structured financial initiative that enables suppliers to receive payment on approved invoices before the standard payment due date, typically in exchange for an early payment discount or cash discount. These programs address the competing working capital needs of buyers and suppliers by providing liquidity acceleration for suppliers while preserving or enhancing the buyer's cash position. Early payment programs have become a cornerstone of modern supply chain finance strategies, strengthening supplier relationships and optimizing working capital across entire business ecosystems.

Extended Payment Terms refer to commercial arrangements where buyers negotiate longer timeframes for invoice payment beyond standard industry practices—for example, extending from Net 30 to Net 60, 90, or even 120 days. These deferred payment terms represent a strategic working capital optimization tool that allows organizations to retain cash longer while maintaining supplier relationships. When combined with supply chain finance solutions, extended payment terms create a powerful mechanism for improving working capital without creating financial strain for suppliers who can access early payment options through third-party funding.

Net Terms represent the standardized timeframe within which a buyer must pay a supplier's invoice in full after the invoice date or receipt. These payment terms, commonly expressed as Net 30, Net 60, or Net 90, establish the contractual foundation for commercial credit relationships and form the backbone of business-to-business payment practices. Understanding net terms is essential for effective cash flow management, as they directly impact working capital requirements, supplier relationships, and the timing of cash conversion cycles across supply chains.

Procure-to-Pay (P2P) is the comprehensive business process that encompasses all activities from the initial identification of a purchasing need through the final payment to suppliers. This end-to-end procurement cycle integrates purchasing, receiving, accounts payable, and payment functions into a streamlined workflow that ensures efficient acquisition of goods and services while maintaining proper financial controls. Understanding the P2P process is essential for optimizing working capital management, as it creates the foundation for supply chain finance integration and establishes the operational framework for strategic payment timing and supplier relationship management.

KYC (Know Your Customer) is a comprehensive due diligence and identity verification process that financial institutions and businesses use to verify the identity, assess the risk profile, and understand the business activities of their clients or partners. In supply chain finance, customer identification procedures serve as a critical compliance gateway that enables suppliers to access financing programs while helping organizations meet regulatory requirements, prevent fraud, and maintain the integrity of their financial systems. These verification procedures have become increasingly important as global supply chains expand and regulatory scrutiny intensifies across international markets.

Trade Payables represent the money a company owes to its suppliers for goods or services received in the ordinary course of business operations. These commercial payables form a critical component of working capital management and appear as current liabilities on the balance sheet, reflecting ongoing business relationships and operational credit arrangements. Understanding trade payables is essential for effective cash flow management, supplier relationship optimization, and strategic implementation of supply chain finance solutions that can enhance working capital while maintaining proper accounting treatment.

An SCF Platform (Supply Chain Finance Platform) is a comprehensive digital system that connects buyers, suppliers, and financial institutions to facilitate supply chain finance transactions and program management. These technology platforms serve as the operational backbone for early payment programs, providing real-time visibility into invoice status, automated payment processing, compliance management, and performance analytics. Understanding SCF platforms is essential for organizations implementing supply chain finance solutions, as these systems enable seamless collaboration between all participants while maintaining security, transparency, and regulatory compliance.

A Multi-Funder Model is a supply chain finance structure that incorporates multiple financial institutions to provide liquidity for early payment programs, creating a competitive marketplace where funders bid for individual transactions or portfolios of invoices. This diversified funding approach enhances program capacity, reduces financing costs through competition, and mitigates concentration risk by distributing funding across multiple capital sources. Multi-funder structures have become increasingly important for large-scale supply chain finance programs where single-funder capacity may be insufficient or where cost optimization through competitive bidding creates significant value.

A Multi-Funder Model is a supply chain finance setup where several different banks or financial institutions work together to provide early payment funding for suppliers, rather than having just one bank handle everything. This multiple funding approach creates more financing capacity, better pricing through competition, and greater reliability because the program doesn't depend on a single financial partner. Understanding multi-funder models is important for finance staff because these arrangements have become increasingly popular for large supply chain finance programs that need more funding capacity and flexibility than any single bank can provide.

Compliance Risk is the potential for a company to face legal penalties, financial losses, or reputational damage by failing to follow applicable laws, regulations, and industry standards. In supply chain finance, regulatory compliance risk encompasses areas such as anti-money laundering (AML) requirements, Know Your Customer (KYC) procedures, financial reporting standards, and international trade regulations. Understanding compliance risk is crucial for finance professionals because violations can result in significant fines, business disruption, and damage to company reputation, making proper risk management essential for sustainable business operations.

A Risk Participation Agreement (RPA) is a legal contract that defines how multiple funding providers in a supply chain finance program share risks, returns, and responsibilities when working together to finance supplier early payments. This risk-sharing agreement establishes the rules for how different banks or financial institutions participate in the same financing program, including how they divide up transactions, share potential losses, and coordinate their activities. Understanding RPAs is important for finance professionals working with large-scale supply chain finance programs because these agreements enable much larger financing capacity than any single bank could provide while clearly defining everyone's roles and obligations.

Trade Payables Classification refers to the accounting treatment that allows supply chain finance obligations to remain categorized as trade payables (operational liabilities) on the balance sheet rather than being reclassified as debt or financial borrowings. This favorable accounting treatment preserves important financial ratios, avoids triggering loan covenant violations, and maintains clean balance sheet presentation even when suppliers receive early payment through third-party financing. Understanding trade payables classification is crucial for finance professionals because it represents one of the key advantages that makes supply chain finance attractive to CFOs who need to optimize working capital while maintaining strong financial metrics and regulatory compliance.

Accounts Payable (AP) represents the money a company owes to its suppliers, vendors, and creditors for goods and services already received but not yet paid for. As a fundamental component of a company's financial operations, accounts payable is recorded as a liability on the balance sheet and plays a critical role in working capital management, cash flow planning, and supply chain relationships.

Supply Chain Finance (SCF), also known as Supplier Finance or Reverse Factoring, is a set of technology-enabled financial solutions that optimize cash flow by allowing businesses to extend their payment terms to suppliers while providing the option for suppliers to receive early payment. This collaborative approach helps strengthen the financial health of supply chains by addressing the competing cash flow needs of both buyers and suppliers.