The mainstream media have been quick to jump on isolated instances of small and mid-sized suppliers being bullied by monolithic corporations imposing punitive payment arrangements. But while such exploitative practices may exist, they’re certainly not the norm: most organisations depend on committed relationships with agile suppliers, rather than adversarial tactics, to sustain competitive advantage. However, it’s a universal truth that buyers will always want to pay as late as possible to keep control over their working capital, while suppliers will always favour earlier payment to regulate their cash flow.
Times are still tight: in recent years, banks have become more specific in their lending criteria for SMEs, even for short-term financing. Meanwhile, according to the FT, the UK largest businesses by market value are sitting on cash piles of £53.3bn. A substantial volume of this cash lies trapped in late payments, threatening to stifle many promising businesses and more importantly negatively impacting the commerce flow within supply chains. That poses a real threat of destabilising the operations of the companies that rely on them.
Governments have recognised the need for prompt payment. There is an EU Directive on Late Payment and the UK government has given the Prompt Payment Code more teeth by urging FTSE 350 companies to sign up to its recommended practice. But this form of state intervention isn’t enough. We need solutions that are beneficial to all players in the supply chain.
Leading organisations are beginning to get a handle on the issue. They are optimising the use of working capital to support the extended supply chain. They are strategically considering how payments are executed, how they are funded as well as the timing of the payment and possibly how discounts could be offered.
For the buyer, extending Days Payable Outstanding, negotiating discounts from suppliers and strengthening their supply chain are just some of the benefits of optimising working capital. And for the supplier? Well they receive payment earlier which in turn reduces Days Sales Outstanding and increases the level of cash in the bank. In fact, a recent article from sharedserviceslink suggested that 25% of companies are now actively adopting supply chain financing schemes – and seeing real results from it. For large buyers savings amounting to $40 million per year could be achieved.
So, what’s stopping organisations from going down this route? We often find that knowing the different options available is one major hurdle. Whatsmore, most of these options today are standalone offerings. They are not integrated into the broader tooling to support working capital, and only cover part of the payables or receivables portfolio. Therefore in my forthcoming blogs I will take a look at:
- What buyers and suppliers need to consider when financing the supply chain
- Alternative models for financing the supply chain
For now though, if you are interested in finding out more about why financing the supply chain is in everybody’s best interests please visit our specific Financing Services and e-Payment pages on basware.co.uk.