Conversations about working capital management often go down the route of discussing payment terms extensions and how that can help improve the payables position on the balance sheet. But a different twist to that dialogue featured prominently in a recent meeting of the Working Capital Forum, kindly supported by Basware.

The Working Capital Forum brings together companies to discuss, under the Chatham House rule, the practical and strategic issues they are encountering as they seek to optimise their payables and receivables – and the processes that wrap around those numbers.

The discussion, which took place at The Ritz on London’s Piccadilly, examined the importance of paying suppliers on time. Whatever the contractual terms may be – and regardless of whether they have been pushed out or not – an organisation’s track record of actually paying on time to those terms is widely viewed as an important part of its reputation amongst its suppliers. In fact, more than half of the participants said on-time payment was a performance target.

The Working Capital Forum

“We pay 98% of suppliers on time,” said a senior finance professional at the event. “Our CEO wants people to be paid on time and for our reputation to be held in the highest regard. It’s about how the world feels about our company.”

It shows what can be achieved if the highest levels in the organisation throw their weight behind a strategic initiative. It also became apparent that automation in isolation cannot make that happen. “You have to make sure you can deliver on your promise to pay,” said one treasury expert. “It’s all very well putting in fancy systems but if you haven’t got the right underlying processes and disciplines, and you haven’t engaged with the stakeholders, then things can easily go wrong.”

His organisation had an almost equally impressive record of paying suppliers on time and has that as a target metric. The performance criteria are based on the volume of invoices, not their value, so from that perspective a £100 invoice carries the same weight as a £1m invoice – even though it’s often the smaller amounts that are subject to dispute by internal stakeholders.

“The return on investment back to the company on dynamic discounting can be pure savings which is a key driver for procurement.”

Two participants said that on-time payment performance was a KPI on their management reporting dashboards, with one adding that it is a key performance indicator for the group executive “and every individual management dashboard beneath it right down to every supplier management team”, he said. Moreover, for his company it is also a measure that is fed back to the suppliers themselves: “The supplier can see how we think we have paid them. And they can challenge if they think that’s wrong.”

The UK’s new ‘duty to report’ regulations, which require larger organisations to provide information on their supplier payment practices and policies, are causing some confusion, however. As one treasury professional observed, “It’s become more difficult to work out if the way we have been reporting internally is actually how we’re meant to report externally. As we delve more deeply in how we’re meant to be doing this we’re not sure we’re getting the right information from our systems to do it.”

Where supply chain finance fits in

This treasurer added that the company is considering implementing a supply chain finance solution – not to be able to extend payment terms “but to help our suppliers, which we see a value in doing,” she said. “If you can take cost out of the supply chain, eventually you could get some benefit through lower costs or better supplier relationships.”

Some participants, especially those at organisations with seasonal peaks in cash, said that they struggle to find ways to invest that cash in a way that generates any meaningful return. One noted that the interest earned on their cash, predominantly euros, was basically zero – “and we pay people to look after it”, he said.

Dynamic discounting was seen by several people as a way of getting a better P&L return on the cash by reducing the cost of goods sold. “The return on investment back to the company on dynamic discounting can be pure savings which is a key driver for procurement,” said one participant who added that, in her organisation, it was procurement and not treasury that was in the front seat on supplier finance initiatives.

“Our SCF programme has been much more successful than I ever imagined it would be. It’s contributing to ‘payment on time’ and helps us reputationally because we are seen to be supporting our supply base.”

Others had a different perspective. As suppliers themselves, they said they were reluctant to accept invitations to join their customers’ supply chain finance programmes. “They cause quite a bit of administration from our side when we don’t necessarily want the early payment terms that it brings. But it comes through from the sales team: ‘This is what the customer wants. If we don’t comply they’ll potentially go elsewhere,’” said one. “However, because we are focused on working capital and how we give ourselves more levers within treasury, we have been experimenting with finance programmes for our own suppliers.”

“Our SCF programme has been much more successful than I ever imagined it would be,” said another finance professional. “It’s contributing to ‘payment on time’ and helps us reputationally because we are seen to be helping our supply base.”

Automation’s real benefits

Automation of processes is an issue that is obviously of key importance. But as Andrew Jesse, VP financing services at Basware noted, done properly, automation is about much more than simply taking headcount out of the business. “The fundamental underpinning is that you are able to generate accurate bills in a timely fashion,” he said. “The amount of cycle time reduction and efficiency you’re going to be able to create is a direct benefit to your suppliers who are on an SCF programme and, in the cases where dynamic discounting is used, your suppliers as well as your overall margin both benefit.

“What you see with any successful programme is a cash conversion cycle analysis to really look at where you stand today, and how far away are you from what’s acceptable. Then start looking for where the big wins are, where the bottlenecks are. If you implement a SCF programme and you can’t get invoices through the platform for 90 days, you’re not going to win,” he said.

The DIKW Pyramid

“Automation is just the tip of the iceberg,” said Louis Fernandes, UK country manager for Basware. “It’s about how you use the data through the ‘DIKW pyramid’ (Data, Intelligence, Knowledge, Wisdom) to drive value back to the business. Having data about what’s going on in your finance and accounting processes that are spread out across myriad systems isn’t helpful. The ability to bring that all together for a single view of finance, allowing you to interrogate it and then elevate it to actionable insight, knowledge and wisdom is where the true value lies. We’re helping to educate people to understand that automation is about the benefit that then plays back into your business.”

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Basware white paper

Basware, the sponsor of this latest Working Capital Forum meeting,  has produced a white paper on how the right working capital optimization and payment strategies can improve your bottom line and working capital position.

You can download your own copy here.