[Editor’s Note: Over the next few weeks on Payables Place, we’re publishing some “best of” 2019 articles as we reflect on the year and prepare for the new year ahead.]
Cash management is a critically-important piece of the corporate puzzle. For the continued health of the average business, maximizing cash on hand has become a priority, forcing organizations to seek new strategies and solutions that support this need. Supply Chain Finance (“SCF”) is tailor-made to solve this problem, helping to extend days payable outstanding (“DPO”) without impugning supplier relationships, an issue that may occur when enterprises extend invoice payment terms directly. Enterprises seeking ways to more effectively manage cash as well as retain the supplier relationships that allow them to remain competitive in an evolving business paradigm would do well to consider SCF as a solution.
Why Pay Suppliers Early?
Many enterprises, particularly when times are tough, view their supply chains as a source of incremental returns. One way that this incremental “profit” can be accessed is by delaying the timing of supplier payments. Nearly one-quarter of all AP teams have prioritized extending payment terms and optimizing DPO as a top priority this year. A high percentage of AP professionals expressed dissatisfaction with their DPO indicates broad-based challenges with B2B payments, but also a significant opportunity for financial value.
Enterprises are, on the whole, not satisfied with their DPO, which can be improved by extending supplier payment terms. Problems arise, however, because suppliers prefer to receive their money faster. The low interest rates that have made finding high yields difficult further complicates matters, and turns managing DPO into a delicate balancing act between holding onto enterprise cash as long as possible and paying suppliers on-time or early in order to maintain a good relationship and/or capture a discount.
Financial and stock analysts, as well as members of the investor class, frequently use DPO to evaluate performance trends and the financial health of a company. A DPO that it is in line with the industry average is considered healthy, while DPOs consistently lower or higher than that trend line can signify potential financial difficulty. The question for enterprises faced with this conundrum then becomes how to achieve both a satisfactory DPO and strong supplier relationships. This tension points to supply chain finance as a method to avoid the “balancing act” all together and create an equitable arrangement for everyone.
Recommendation
Consider which suppliers will be given the option to participate in the SCF program. SCF has traditionally been offered only to large suppliers, but the rise of cloud solutions has made it possible to offer these terms to additional vendors. This does not necessarily mean that every supplier should be offered SCF – the enterprise may not do enough business with certain suppliers – or even want to participate. Either way, the enterprise must build the SCF program carefully to ensure maximum working capital benefits.
