Historically, the extension of payment terms often meant that a company was having cash flow issues. Today, however, too many organisations are using it as a strategy to maximise working capital. This may benefit the buyer – but what about the supplier who is getting paid later and later? As positioned by the NY Times in this article, the additional financing costs that suppliers incur because they aren’t being paid promptly work their way back into higher prices for consumers.
In my previous blog, I looked at financing in the supply chain as an alternative solution to getting a grip on late payment culture and optimising working capital. I argued that it is a win-win for both buyers and suppliers (if done correctly) and presented some staggering numbers to demonstrate the value companies are already getting from this. Before jumping head first into such schemes, however, there are a number of considerations that need to be made in order to really start optimising the use of working capital to support the supply chain.
The starting point
Organisations that get the most out of alternative financing models have put a foundation in place where Accounts Payable, Purchase-to-Pay (P2P), Accounts Receivable and Order-to-Cash processes are automated as much as possible. Why? Because the process efficiencies gained through such automation are the foundation to getting purchase orders and invoices approved as quickly as possible. These two documents are often the starting point for payments, financing and supplying assurances.
As an example, Accounts Payable automation is aimed at digitalising the incoming invoice, the automated processing of this invoice, and automatic matching with the purchase order or original contract, followed by an electronically supported workflow of the approval process.
The automation of these processes doesn’t just deliver the operational benefits of process efficiencies and cost savings. More importantly, automation lays down the foundation for optimising working capital across the entire supply chain.
Going beyond automation
Following a certain level of automation, organisations then need to ask themselves four questions. From a buyer (or rather, accounts payable) perspective:
• How do I execute payments?
• How do I fund payments?
• When do I make a payment?
• And if done correctly, could I manage discounts?
And vice versa for the supplier. They should be questioning:
• How do I want to receive payments?
• When do I want to receive a payment?
• How do I fund the period while receivables are outstanding?
• And if done correctly, do I want to offer discounts?
Organisations that are getting the most out of cleverly combining payment, funding, timings and discounts tend to generate the biggest working capital and process optimisation benefits from their supply chain.