The first meeting of The Working Capital Forum, held in London, discussed how to optimise working capital without harming suppliers.
The event – sponsored by Taulia and hosted by Mike Hewitt, Adaugeo Media managing director and director of The Working Capital Forum – brought together treasury, procurement and P2P (procure-to-pay) professionals from across the industry spectrum, as well as academics and finance experts.
While working capital was acknowledged to be one of the easiest and cheapest ways to generate cash, it was also evident that supplier risk management and payments terms policies go hand-in-hand.
As one participant said, companies that are able to deal on equal terms with each other can agree what they want, but they ought to consider whether it’s really appropriate to push small suppliers out to, say, 150 days – and, indeed, whether there is any real benefit in trying to do so.
Another participant said that they were surprised to discover that their competitors had considerably longer payment in place and so an initiative to extend terms to 60 days was readily accepted by suppliers – “but you must pay on the day,” he said. “That means suppliers can plan for it and forecast it and they know it’s coming.”
“There has been a deliberate move around terms,” said another participant, “but we went into it with the idea that this had to be a partnership approach with our suppliers.”
A world of differences
Different payment practices and cultures around the world make it difficult to introduce global processes and policies, participants agreed, though there is scope to introduce standardised platforms and tools. “You standardise what you can and then you have to adapt it for each country,” said one. “We have national solutions and regional solutions but no global solutions,” said another. “You can have a global programme and global standards, but not global terms.”
A couple of participants mentioned the problem that arises if a sizeable amount of corporate spend doesn’t actually go through procurement. “If you want to implement change, that makes things very difficult.”
Standard payment terms in the US are 60 days, in Europe 90 days, but in China 120 days, said a participant with global operations – and for small companies in China, borrowing costs average around 30%. In other words, 10% of Chinese SME revenue is being spent on financing costs, creating a significant opportunity for companies to share the benefits of paying their Chinese suppliers early.
A few participants, however, expressed some dissatisfaction with the supply chain finance programmes they had in place – one in particular noting that the take-up among his suppliers was very low. The problem, he said, was the massive documentation burden of the on-boarding process, though another said that once the programme was up and running it was fine.
Bertram Meyer, president and co-founder of Taulia, explained the ethos behind his company: “We wanted to create a platform that gives the supplier the opportunity to get paid early against a discount or financing fee without creating a lot of hurdles to get there. Then we needed to create the flexibility for that payment to either come from you, if you want to use your own balance sheet, or from a third party if you want to do that. Then your supply chain becomes a breathing tool and part of how you manage cash while at the same time your supplier can always get paid early.”
Finding out the facts
The Working Capital Forum is facilitating research by Cranfield University. Researcher Daniel Kohlmann and Dr Simon Templar explained that they are trying to find out what corporations are doing in terms of their supply chain, how they mitigate the impact of longer payment terms, and whether there is any reputation impact.“You’ve thrown the stone into the lake – how do you manage the responsibility of that decision?” said Dr Templar.
The report will be available in November and members of The Working Capital Forum are invited to take part in the research.
In closing the meeting and thanking the participants, Mike Hewitt said that the activities of The Working Capital Forum will be driven by the members. We welcome not only suggestions for topics for future meetings or research projects but also article contributions that members would like to share. A members-only LinkedIn group has been established to help facilitate discussion on key issues between meetings.
One real strength of the group is the fact that its membership spans a number of functions, in particular treasury and procurement. As one participant said, “If you can bring different functions together it’s a lot more powerful. The problem is that people are so silo’d in their areas.”
The strength of this forum was in its ability to gather together senior decision makers from large buying organisations who were then able to have a rational discussion about payment terms and working capital without the impingement of the media hype machine.
What emerged for me was a desire of the vast majority of buyers to ‘do the right thing’ by their suppliers. However, as a number pointed out that doesn’t mean necessarily paying instantly. It means understanding that different groups of suppliers have different needs and acting accordingly with a view to still being commercially astute.
What was also useful in my view was the ability to discuss the art of the possible. While traditional SCF has had a useful, but limited impact. Technology and tools now exist to enable vastly improved financing tools for the whole supply chain.
SCF can work if it is ‘fair’ to all participants, and that includes those suppliers and customers for that matter outside the main SCF scheme. As a supplier and ‘caught’ within two corporate client SCF schemes my concern is that as work occurs in peak and troughs you are inside one of the SCF scheme’s one quarter and then out the next. In the other SCF scheme I ‘lose’ the discount as my values do not break the required threshold…..so again I end up pricing work on the basis of ‘losing’ money because of the payment process driven by SCF. And my area of expertise is….SCF implementation from a corporate social responsibility aspect!
I’m optimistic and convinced that the paradigm of working capital is shifting to “pay me now” and back to the creditworthiness of the buyer instead of the vendor.
We all agree in private life that we first have to do saving or looking for the necessary credit lines before buying new cars, houses our appliances. We will never sell our used car on a website and agree being paid in 3 months. Payment at or before picking it up, will be our motto. The buyer must proof his creditworthiness, not the vendor. Why we are doing this in commercial situations? It is in every case one of the bigger hurdles of Starters and Small Businesses to get the necessary funds to finance their well-established business partners. Starters just don’t get access to the necessary funds to finance their supply chain. Wouldn’t it be of a great help if we would change to the simple rules we use in our private lives? Wouldn’t it lead to more transparency ? Should not the whole supply chain try to gain from financing at the partner where the money is cheapest? Nowadays it is seems often to have more from a kind of a fight of the strongest who is financing himself on the back of the weakest, to become even bigger.
See more to my recent post: https://www.linkedin.com/pulse/paradigm-working-capital-shifting-pay-me-now-jos-feyaerts?trk=prof-post