Asking a dozen procurement, finance and treasury executives to take time away from their busy schedules in the middle of the day is no easy feat, but there's one topic that's sure to bring them together – working capital optimisation. And that was the focus of the Working Capital Forum held for the first time in the United States last week in New York City. Here are five things we learned from the engaging small-group discussion that took place that day.
Leverage technology to support working capital: As this group of CFOs, CPOs and Treasurers began discussing working capital, there was a bit of "what came first - the chicken or the egg?" discussion. Some indicated that the need to optimise working capital was a driver in automating procure-to-pay processes, while others in attendance said their companies began exploring working capital optimisation because they could visualise the potential through financial data capture and efficiency realised with procure-to-pay automation. Everyone agreed that you must first start by fixing inefficient processes, then add technology. Then, as companies are able to expedite and see their payment times, they can begin looking at how to be strategic about when they pay. Using procure-to-pay automation to simplify and streamline processes, gain real-time visibility into spending and liabilities, standardise purchasing and right-size the supply base, it is clear that technology plays a critical role in managing working capital.
Define a set of preferred payment terms: Attendees agreed that extending payment terms is not the only way to optimise working capital, but it is a primary method in the strategy. One finance leader offered his company's approach to extending payment terms, and it started by taking inventory of all the payment terms being used across the organisation. What he found was nearly 300 different payment terms! Others nodded their heads in agreement. It seems many organisations – especially those with a de-centralised procurement function – are dealing with the issue. This company in particular decided to define a set of 6 standard payment terms that they would use to approach suppliers. This meant they could control when they made payments and more accurately forecast cash flow.
Encourage contracts with key suppliers: Another company present had already successfully extended their payment terms to net 90 days for suppliers without contracts. For those suppliers on-contract, they honored the contract terms until the contract was up for renewal, and then renewed the contract at net 30 days. Not only did this give them a considerable extension on days payable outstanding (DPO) with many suppliers, they were able to encourage other suppliers to consider a contract and negotiate better pricing.
Give suppliers options: The obvious sensitivity around extending payment terms is the potential for unfavorable response and/or negative impact on suppliers, and this came up during the discussion as well. Depending on the cash position of suppliers, extending DPO may create financial instability and that in turn poses supply chain risk. Two attendees from different companies offered their approaches to this sticky situation. The first attendee said their CPO and CFO collaborated to determine the new payment terms and approached suppliers together to communicate the forthcoming changes. This approach included a jointly signed letter that explained the strategic need for this change. The second attendee said they mandated the extended payment terms, but offered suppliers the options to negotiate a contract with different payment terms or accept an e-payable solution. While suppliers may have to pay a processing fee with the virtual credit card option, they could still get paid quickly. This same person also said they are looking into a dynamic discounting solution to enable their suppliers to raise their hand and take payment when it's best for them for a sum that is discounted, depending on when they accept it (e.g. – accepting payment at day 60 for a sum that is discounted by 2%).
Make working capital a shared business priority: The final question of the event asked the attendees to share who in their organisations is in charge of working capital. The resounding answer across the table was that Treasury is in charge of working capital, but the success of any working capital strategy is absolutely dependent on collaboration between Treasury, Procurement and Finance. In the words of one attendee, "Procurement is where you make or break business." One attendee recommended making working capital a priority across teams by setting goals and KPIs for working capital instead of some of the traditional success metrics. In his experience, having compensation increases set to traditional procurement KPIs is contradictory to working capital goals and does not motivate procurement managers.
As the lunch drew to a close and attendees exchanged final comments following the productive discussion, there was a sense of reassurance in the room. Some attendees were just embarking on their journey of working capital optimisation, while others were veterans on the trail – but all agreed that working capital is an on-going endeavor that is never truly finished. Continuous adjustments and on-going education are required to ensure effectiveness of the strategy. And so, we are grateful to have been a part of this initiative to facilitate the sharing of best practices for working capital optimisation through the Working Capital Forum held by Adaugeo Media.
The Working Capital Forum is an invitation-only peer group which holds regular meetings in European financial centers, publishes a quarterly newsletter and sponsors research at business schools across Europe. It is a member of the Supply Chain Finance Community. To inquire about membership or attending events, contact enquiries@workingcapitalforum.com.