Cash Is King: Managing Spend to Improve Capital Efficiency
Leveraging purchasing power to capture volume-based pricing within a competitive supply chain builds solid relationships with reputable suppliers, cuts costs, and acts as a hedge against inflation. Your
organization’s total spend is a dynamic tool. If we apply the adage of, “Whomsoever holds the gold makes the rules”, we can further leverage this purchasing power to unlock working capital, improve capital efficiency, and deliver savings.
Supplier trade credits and terms are a great place to start. The goal of trade credits is for the supplier to provide a 0% interest loan for goods or services, allowing the buyer time to convert these inputs into a sale. Under the standard trade terms of Net 30, the buyer is given 30 days to pay the supplier after receiving the invoice for goods or services rendered. The truth is, to turn inventory, make the sale, and then collect funds takes most buyers longer than 30 days. This situation leaves their working capital exposed. Understanding this situation has necessitated some buyers to demand longer payment terms in exchange for higher purchase volume. Once again, buyers fully understand the value of their annual Spend and leverage it to push payment terms out to 60, 90, or even 120 days in some situations.
What happens when a buyer has an additional 30 - 60 days to pay their suppliers? Cash is freed up and gives the buyer the option to redeploy it into other value-accretive opportunities such as organic/inorganic growth opportunities, paying down debt, or even capturing early payment discounts from the supply chain. Is it worth it? You bet it is!
Let’s for a minute consider the discount trade terms of 2/10 Net 30. By paying a supplier in 10 days versus 30, a buyer can successfully deploy their unlocked working capital, capture the supplier discount that incrementally lowers the cost of revenue by 2%, and generate a yield of over 36% APR! In the current environment, it is fair to say there are not too many guaranteed investments your Treasury Department can leverage yielding this return. From the supplier’s point of view, offering discount terms is an excellent way to manage cash flows, navigate cash, seasonal needs, and avoid short-term borrowing or bank constraints. Proper execution benefits all parties.
Once working capital is freed up and suppliers that either offer early payment discounts or may have the need to be paid early are identified, what is the most efficient way to execute your plan? It has never been easier! There are several fully integrated Dynamic Discounting technology solutions available to identify suppliers with the early payment option, learn more here. In addition, requests for early payment can be made through the supplier portal by the supplier allowing them to pick a settlement date while recognizing the cost of the discount beforehand. These tools help buyers deploy excess cash while allowing their suppliers to match current cash needs with the opportunity to be paid early. Again, this benefits all parties involved.
Always remember - cash is king! Cash is an influential tool to leverage when exacting volume discounts, extending terms, capturing terms discounts and creating long-lasting and healthy supplier relationships. With today’s technology solutions, it is easier than ever to put your working capital to work!