As working capital increasingly becomes a top-level agenda item, businesses are struggling with the requirements of the Duty to Report legislation and finding that their data quality presents difficult challenges to their working capital strategy and their compliance.
These tough issues were discussed in the latest Working Capital Forum, held in October at the Institute of Directors in London’s Pall Mall, generously supported by Lloyds Bank. Chairing the forum was Mike Hewitt, CEO of the organisers, Adaugeo Media. Taking part were almost a dozen professionals from the world of treasury and procurement across a wide range of industries.
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 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.
“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.”
For the treasurers and procurement directors who gathered at The Ritz for the latest meeting of the Working Capital Forum on 15th June, there was little doubt that a supplier finance strategy was an idea whose time has come. With a couple of exceptions, all were either engaged in, or about to start, a review of working capital or supplier finance in their companies, which ranged from global automotive suppliers to medical, industrial and retail giants.
All were aware of what some called the 'first wave' of supplier finance projects , which concentrated on extending Days Payable Outstanding (DPO), so freeing cash trapped in working capital for other uses. But for at least two of the corporations present, who spoke under the Chatham House Rule, the issue wasn't a desire to pay later- rather, they were interested in using surplus cash to offer early payment to suppliers in return for discounts, reducing the Cost of Goods Sold (COGS) and directly boosting profits.
Underlying the discussion was a 'snap poll' commissioned by the Working Capital Forum and its sponsor for the day, Taulia. The short report on its findings (which can be downloaded here) showed that, for the 26 corporations who responded, the goals for a supplier finance strategy covered a wide spectrum , though the most popular was still working capital optimisation.
Getting internal agreement to such a strategy presented difficulties for many around the table. With one exception, it was procurement rather than treasury which was pushing for supplier finance initiatives. One procurement director said that treasury in his organisation was resolutely opposed to supply chain finance, believing that it simply added cost. Others mentioned the critical role of IT in ensuring that a supplier finance programme was successfully integrated into the business.
For many at the lunch, a key element of any supplier finance strategy was to reach down beyond the top tier of suppliers into tier two and three, where small but critical suppliers might need support. One gave the example of a small software company which was responsible for a critical piece of code.
As the meeting ended, treasurers and procurement directors were exchanging ideas on how to surmount some of these obstacles and looking forward to future meetings. Working capital forum director Mike Hewitt announced that future meetings were already being planned for London, Manchester, New York and Stockholm.
Treasury is in the driving seat. But it has to take the rest of the organisation with it.
Who owns working capital? That was the question debated by participants at the latest Working Capital Forum, held on this occasion as one of the streams at Basware Connect in London’s Docklands.
The answer on which the Forum agreed, the treasurer, may perhaps have been obvious. But the discussion raised interesting and helpful nuances and issues that are important to consider if a working capital management programme is to achieve optimal success.
Ad Van Der Poel, Basware senior vice president of financing services, said that responsibility for working capital varies from one organisation to another but that generally the responsibility winds up with the treasurer. “They are very focused on cash flow and trying to forecast cash flow, but they don’t necessarily take on the working capital element.”
The latest Working Capital Forum saw treasury and procurement leaders from ten multinationals and two universities tackle the sometimes thorny issue of liquidity in the supply chain, and who is really responsible for protecting it?
What are a company’s responsibilities to its supply chain? And should a company be responsible for the supply chain? These themes were aired at the June meeting of the Working Capital Forum, held at the Dorchester hotel in London.
The discussion was started by Matthew Stammers, European marketing director for lunch sponsor Taulia, who started the dialogue by summarising the recently-published white paper. Taking its inspiration from the well-known ‘value chain analysis’ by Michael Porter, the paper looked at the cash conversion cycle of the financial supply chain. It argued: “When the world’s largest buying organisations with the best credit ratings are effectively pushing the liquidity loading to smaller, less well rated suppliers they are adding cost to the system.”
Matthew Stammers, European marketing director at Taulia (right), argues that corporate CFOs need to move away from ensuring that their companies are properly funded to ensuring that their supply chains are properly funded.
I was in a great conversation the other day where we were talking through Porter’s Value Chain Analysis model in the context of the financial supply chain. For those who don’t know it, the model (Fig 1.) proposes that companies build value by taking in raw materials and components, and then through a manufacturing process, convert these into finished goods and services. The marketing and sales functions then add further value by taking these products into the marketplace and selling them for more than the cost of production and raw materials - hence the concept of value creation.
Inside the WCF...
A small selection of images from recent Working Capital Forum meeting.s