Almost from time immemorial, accounts payable has been buried in organizational back offices as a pure cost center.  A necessary evil, but not one offering a lot of strategic value.  However, that is changing as more and more companies see the strategic role AP should play in working capital initiatives and cash flow visibility. 

But beyond that, some best in class AP organizations are transforming themselves from pure cost centers into actual profit centers!   Check out this video of ONEOK's T.D. Eureste talking about he is doing just that!

Great pair of articles today on CNBC and FT.com. 

CNBC reports corporate cash as being up around 3.7 Trillion....which is an awfully high and questionable number, but the questions the article raises are good ones nonetheless:  What are corporates going to do with this casha dn when are they going to start drawing it down significantly.  The answer seems to be that long term expenditures (capex, hiring, M&A, etc.) will continue to be cautious & pragmatic for some time.  The FT.com article then points out that "From a flows perspective, capital expenditures are being surpassed by internally generated cash flows at a quarterly annualized rate of ~$200 billion. Thus, companies are still adding significantly to their $1.9 trillion cash mountain." 

So, with capital outlays continuing at a measured pace which is surpassed by cash flows, FT.Com rightly states: "Whatever happens, that is still an awful lot of liquidity in search of investable ideas"

Until such a time as companies release most or all of that cash into long term, capex-type investments, what are companies to do to earn their investors a return on all that cash?  Check out this blog for an idea how that cash can invest some of that liquidity to earn risk free, double digit annualized returns.  Or, better yet, get your pass to AribaLIVE and come hear how 3 Ariba customers are doing exactly that while also reducing risk in their supply chains!

PS -- IF you register for AribaLIVE using the promo code: LIVECFO, you will receive $800 off the regular price for AribaLIVE! 

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Dynamic Discounting: New Opportunities for No-Risk, High-Yield Cash Returns

AP and Treasury leaders are quickly learning that a well-structured discount program can deliver short-term cash returns of 12 percent, 18 percent, and 24 percent or higher, with no risk. Attend this session to learn how to effectively maintain or extend DPO and maximize early payment discounts. Hear how your peers in finance have successfully deployed these strategies to maximize discount capture, optimize payment terms, dynamically capture discount savings, and provide valuable liquidity to key suppliers while maintaining control over their cash flow.

Speakers:

• Dollar Tree: Tim Bennett, Director of Strategic Sourcing and Procurement
• Mediafly: John Evarts, CFO
• ONEOK: T.D. Eureste, Dirctor Treasury and Finance
• Republic Services: Ariba Platform Supervisor

Here's another peek into some of the great content awaiting you at  Ariba Live!  Tim Bennett, Director of Strategic Sourcing and Procurement will share some insight into  Dollar Tree's Collaborative Commerce journey from Sourcing to Invoice Automation to full P2P with an emphasis on how the dynamic discount value proposition fueled the ROI in their business case and supercharged their P2P initiative.  Some things you'll learn:

• How Dollar Tree was able to pay for their entire P2P investment in under 1 year with savings from Dynamic Discounting!
• How they achieved 92% of targeted suppliers transacting within the first 12 months of their project
• How Dollar Tree is achieving significant double-digit returns on the cash they deploy for discounting while providing a win for their suppliers too

Make sure you circle this session as you make your plans for Ariba Live!   In addition, Dollar Tree's Chief Operating Officer, Gary Philbin will be a keynote speaker on Mainstage just before this breakout session.  You won;t want to miss his presentation on Dollar Tree's overall approach to Collaborative Commerce.

I hope to see you there!

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Dynamic Discounting: New Opportunities for No-Risk, High-Yield Cash Returns

AP and Treasury leaders are quickly learning that a well-structured discount program can deliver short-term cash returns of 12 percent, 18 percent, and 24 percent or higher, with no risk. Attend this session to learn how to effectively maintain or extend DPO and maximize early payment discounts. Hear how your peers in finance have successfully deployed these strategies to maximize discount capture, optimize payment terms, dynamically capture discount savings, and provide valuable liquidity to key suppliers while maintaining control over their cash flow.

Speakers:

• Dollar Tree: Tim Bennett, Director of Strategic Sourcing and Procurement
• Mediafly: John Evarts, CFO
• ONEOK: T.D. Eureste, Dirctor Treasury and Finance
• Republic Services: Ariba Platform Supervisor

Are you going to Ariba Live in Vegas this year?  If you are, don;t forget to mark this session on Thursday 4/12 at 1:30 as a must-attend session!  Ariba Discount Pro customers Dollar Tree, Republic Services and ONEOK will share their Dynamic Discounting journeys and lessons learned on a panel also with Mediafly, a supplier who used accelerated payment opportunities to help grow their business.  These companies have driven bottom line savings while providing strong value to their suppliers.  Come to the session and learn how you can do the same!

If you have any questions about the session, don;t hesitate to give me a call.  Also, follow me on Twitter (@dhofler) to receive regular updates on how companies are embracing the networked economy and driving their business forward.

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Dynamic Discounting: New Opportunities for No-Risk, High-Yield Cash Returns

AP and Treasury leaders are quickly learning that a well-structured discount program can deliver short-term cash returns of 12 percent, 18 percent, and 24 percent or higher, with no risk. Attend this session to learn how to effectively maintain or extend DPO and maximize early payment discounts. Hear how your peers in finance have successfully deployed these strategies to maximize discount capture, optimize payment terms, dynamically capture discount savings, and provide valuable liquidity to key suppliers while maintaining control over their cash flow.

Speakers:

• Dollar Tree
• Mediafly
• ONEOK
• Republic Services

I just read an interesting blog post in the CFO Journal at WSJ about how a majority of Corporate Treasurers are unhappy with upcoming Money Market reforms and are planning to pull cash out of this common short term investment vehicle.  US Securities regulators are proposing to initiate some reforms to make Money Market liquidity accounts "sturdier" and avoid some of the hidden risks associated with them.  You can read the article for the specific details, but the upshot apparently is that Money Market accounts, long prized for being highly liquid, very secure places to invest short-term cash may be losing their luster.

The problem is, in this risk-filled, low-interest environment, where are they going to put it?  There are certainly any number of other short term liquidity investment choices out there that will gladly absorb the soon to be homeless corporate cash, but all of them contain some level of risk, however small, and provide next to nothing in return in this era of 0% short term interest rates.  But as one person quoted states: “If you look at the goals of a corporate treasury, it is investing to preserve its capital and maintain liquidity."

Preserve capital...meaning a very safe investment.  And Maintaining liquidity...meaning something short term that doesn't tie cash up for very long.

Might I suggest an alternative investment for at least some of that cash?  An investment that is both perfectly safe (in fact is 100% risk free) and is short term (30-45 days or whatever their vendor payment terms are), and one that oh, by the way, can earn them anywhere from 8%-24% or more annualized on that cash all while providing much needed liquidity to a critical component of their business...their suppliers.

If you have read my blogs before, you know I am talking about Dynamic Discounting, a technology and service Ariba provides to connect buyers with their suppliers to collaborate over early payment opportunities beneficial to both.  In fact, let me invite you to learn more about how one of our customers, Republic Services, is doing just that to earn millions of dollars a year in savings and meeting their suppliers' needs at the same time.  They are presenting in a webinar with us on Thursday, March 15..you can check it out and register here.

There just aren't many great opportunities for corporations to put their excess cash to good use in a short tenor investment today.  Dynamic Discounting, however is a great investment both for your bottom line, as well as for your suppliers.

OK, so the Rhyme of the Ancient Mariner reference in the title may be a bit obtuse, but the fact is that corporate ships across the US, UK & Europe are awash in a sea of cash, the return on which is so poor it has left them thirsty for more.

The US Federal Reserve yesterday released it's quarterly report on US Corporate cash holdings.  According to the Fed, US companies are now holding $2.12 Trillion in cash and cash equivalents (liquid, less than 1 year investments) on their balance sheets.  This is yet another new record and represents the continuation of a trend of quarterly records that has been going on for some time, accelerated of course since 2008 and the start of the Great Recession.  The same is holding true for European & UK corporations as well, with the latest numbers showing that Eurozone corporations hold ~1.94 Trillion Euro and UK companies holding 750 Billion Pounds Sterling!

Given the current economic turmoil and uncertainty in the Eurozone and the broader worldwide economy, it is not surprising that companies have built up a cash pile as a hedge against this uncertainty.  In fact, in this Reuters article, Economist Jeff Greenberg says that "The notion of 'fool me once shame on you, fool me twice shame on me' is fully reflected in corporate balance sheets."  In other words, those companies who weathered the last few years and labored to free up cash flow from their operations are not going to be caught again without a sufficient cash buffer to weather the next financial storm.  As a result, corporate cash balances don't appear to be going anywhere anytime soon...Treasurers and CFO's like the security and safety of such ready liquidity.

The problem is that all that cash is just sitting in financial institutions and short term liquidity investments earning next to nothing.  According to the December, 2011 Quarterly Corporate Cash Survey from Treasury Strategies, inc., corporations in the US are holding almost 75% of their total liquidity in overnight investments, money funds and bank deposits.  And per Bloomberg.com, the predominant indices for these short term investment returns are all at all time lows with the Fed Funds rate sitting at 0.08%, 1 Month Libor at 0.28% and 3 Month Libor at 0.54%.  In fact, with the announcement today by the European Central Bank (ECB) that they are returning their index rate to it's historic low of 1%, pretty much every low risk, short term liquidity investment option (under 12 months tenor) is earning less that 1% annually! 

So why are Treasurers keeping so much cash in liquidity vehicles that earn them next to nothing in return (save Earnings Credits against their bank fees)?  Because after being burned and struggling to stockpile their cash over the last few years, Security of that capital is key. In a recent WSJ article, Samuel Strickland, CFO of Booz Allen Hamilton reflected this thinking when he said his firm is keeping its cash in safe instruments like U.S. Treasurys, even though they are “yielding almost nothing,” because the “mission is not to lose principal." Even so, Strickland "says some of his company’s investors are getting antsy for management to put its cash to better use or return it to shareholders."

It makes perfect sense that companies are holding large amounts of cash, given the high levels of economic uncertainty. And it is a sound strategy to put that cash into short-term, very low-risk investements that first and foremost ensure that the principal is maintained.  Those investments may not yield anything, and there may be pressure to get better return on that cash from investors, but bottom line they protect their liquidity.

But what if there were a short-term investment of cash that had absolutely no risk to principle associated with it and also yielded double-digit annual returns on cash invested there? 

Sounds like a pipe-dream, I mean everybody knows from investment 101 that yield follows risk and term of investment.  The risker or longer term the investement, the higher the expected return.  By contrast, the shorter the term and lower the risk, the lower the return on investment (e.g. overnight deposit rates of .08% APR).  But there is indeed one such short tenor investment opportunity for corporate cash that is completely risk-free and is currently yielding anywhere from 8% - 24%+ APR to those companies now taking advantage of it.  It's called Dynamic Discounting and the investment is in their own supply chain.

At it's root, dynamic discounting allows companies to take advantage of the opportunity created when an invoice is approved significantly sooner than it is due to be paid, by making that approval visible to their suppliers via an online portal and giving them the opportunity to ask for or accept an offer of accelerated early payment in exchange for some level of discount.  This provides a greater return on cash to the buyer for the period deployed (e.g. 30 days early payment is like a 30 day investment of cash) while reducing DSO and providing much needed liquidity to the supplier. 

In fact, Ariba customers using Ariba's Discount Pro (TM) solution on the Ariba Network (TM) are capturing an average of $2 Million in early payment savings for every $1 Billion of targeted spend, at an average return on their cash of 18% APR. A risk-free return, I might add, as it simply invests cash to remove a liability early. And since this savings and return is based on an investment in their own supply chain and providing liquidity to suppliers who need/want it, not only is the investment risk free, but it actually REDUCES liquidity risk in their supply chain.  Surely that investment beats letting cash sit idle in bank and money market accounts!

And suppliers love it!  One media-related supplier using the accelerated cash flow to hire more staff so they can add more releases to their product faster and so gain more business states that "the value of accelerated cash flow to us far outweighs the cost."   While another supplier to a large sports products company said , "With Ariba electronic invoicing, we get our invoices paid as quickly as four days, and the visibility into payment status is like gold."

Let's see, risk-free, short term investment for cash?  Check. Double digit annual returns?  Check.  Reduced supply chain risk?   Check.  Suppliers eager to participate?  Check.   Sounds like the makings of a great cash investment plan to me.   For corporate treasurers and CFO's looking for a better way to deploy some of their strategic cash reserves over the near term for a better return without risk to their principle, there is no better investment than their own supply chain. 

Two days & two significant developments...care to make it three? (I hope not!)

First, Standard & Poor's shot heard around the world as they downgraded the US credit rating to AA+ for the first time in generations.  And then hard on the heels of the market turmoil caused by the S&P action, "The U.S. Federal Reserve signaled it plans to keep its benchmark short-term interest rate close to zero for at least another two years as it sharply downgraded its view of the U.S. economy." (WSJ, August 9, 2011)

As companies learned in the market collapse of 2008, one of the key weapons in their arsenal to combat this turmoil is to fill their coffers with cash as a hedge against an uncertain future.  In fact, in early June the Federal Reserve reported that US companies were continuing to hoard cash at unprecedented levels with balances at that time climbing to $1.91 Trillion .   It appears that this trend will continue and possibly even accelerate as large companies sell corporate bonds (while corporate borrowing rates remain relatively low as the market shakes out) in an effort to increase their cash holdings, as reported in the Wall Street Journal yesterday:

"Although the S&P downgrade threatens to dry up already thin trading in the investment-grade-bond market, rates remain relatively low on a historical basis for corporate borrowers, and their borrowing is likely to pick up, Mr. Bender said. Indeed, companies of all stripes moved to bolster their finances last week, prior to the downgrade. A raft of investment-grade companies including Coca-Cola Co., Hyatt Hotels Corp., J.P. Morgan Chase & Co. and Kinder Morgan Energy Partners LP sold about $5 billion of bonds. But rather than using these funds for hiring, capital expenditures, or even shareholder dividends, corporations are filling their coffers further, said Mr. Carfang of Treasury Strategies.

Those hoping that executives are looking for an excuse to loosen the purse strings are headed for a disappointment, said Steven Lear, deputy chief investment officer at J.P. Morgan Asset Management. "We see these large surpluses held by Asian countries and that's a natural response to the crisis they went through in 1997-1998, saying 'You know what, we're never going to be short cash again,' " Mr. Lear said. "Corporate treasurers in the U.S. went through that in 2008, and their reaction is going to be the same."

And this is in the light of continued historic lows in short term cash rates of return that, per the Fed's comments today, will apparently remain close to zero through mid-2013!

This presents a bit of a conundrum for corporate Treasurers who, on the one hand are embracing the need to keep cash on hand as a hedge against uncertainty, but on the other hand are tasked with managing that liquidity and getting the most out of it that they can.  The problem being that there are precious few traditional options for parking liquidity and getting any sort of short term return on that cash -- Treasurers keeping cash on the balance sheet usually will “invest” it in highly liquid, highly secure short term securities that are tagged to these benchmark rates (Money Market Mutual Funds, Interest Bearing deposit accounts, US Treasuries, etc.), which typically earn the benchmark rate MINUS some spread…so basically nothing. (As of 8/8/11 -- Fed Funds = 0.13% APR; 3 Month LIBOR = 0.27% APR).

There IS a better alternative!

Ariba, Inc.'s Discount Pro(TM) product is giving dozens of corporations an alternative way to deploy their cash in similarly short term increments (30, 45, 60+ days) for a rate of return far higher than they can otherwise achieve and in an “investment” that is perfectly safe and benefits their own supply chain. Utilizing the Ariba Network(TM) to connect to their suppliers, these corporates are able to collaborate over favorable cash flow terms with their suppliers and automate the process of providing early payment to their suppliers from their piles of cash in exchange for a discount equating to anywhere from 10% - 36%+ APR return on that cash.

Not only does this benefit the buying organization, it also is of great value to their suppliers.  While suppliers’ access to credit has loosened somewhat in the past year, it has not done so dramatically, and those who access it often have to do so at the cost of fairly restrictive loan covenants while adding debt to their own balance sheets.  Taking early payment, on the other hand, increases cash flow without debt and lowers DSO for suppliers, all at a cost that is often lower than their alternatives...and far more readily accessible!

What is your compnay doing with your cash?  Have you thought about your supply chain & collaborating to satisfy both their cash flow and your cash return needs?  See here for more information about how Ariba can help.