“Liquidity is the lifeblood of the Supply Chain - leverage The Time Value of Money"
The down economy is more than a year old and we find ourselves speculating..... I hear others say they think the economy has stabilized. Others say we are recovering and I hear a growing number of people saying the economy is just stalled and ready to take another step down. It is difficult to be sure but the ships leaving China today are still full of seatainers, but you can tell they are empty when you look at the waterline on the ships and realize they are riding high in the water. We are hearing about more over-the-road trucks turning over in the wind because they have an empty load. I’m not suggesting you use this as an economic predictor, but there clearly is uncertainty today.
Since the beginning of trade there has been the natural tension between buyers and suppliers relative to “The Time Value of Money”. All CFO’s are trained to pay late and collect early. It is baked into our economy. This tension is exaggerated in today’s economy as we see buyers extending terms and suppliers looking to collect as early as possible. This movement to protect and more closely manage liquidity is just increasing the tension between buyers and suppliers. Price Negotiations and Price Concessions are not in play here, this is about survival. Recently a supplier on the Ariba Network sold more than $400K in receivables via our partner, The Receivables Exchange. The Supplier called back and shared with us that getting the $400K early saved his business. He would have had to shut the doors. A buyer called us recently and shared their initiative to reduce their total Working Capital Days by 3 days but could not find all they needed on the Payables extension of terms and didn’t want to put risk into their supply chain by stressing their suppliers need for Liquidity. So, we discussed with them a strategy to look at reducing Working Capital Days by expanding their view. We discussed looking at their Working Capital from both their buying and selling side, both Payables and Receivables. If they could drive early collection on their selling side by auctioning their Receivables on The Receivables Exchange and via offering Early Payment Discount terms while focusing on extending terms to Suppliers for Payables and both offering their suppliers early payment terms and the chance to auction their receivables, the overall Working Capital Days could be reduced to not only 3 days, but potentially 5 over the whole company.
So, What is the point to this blog? Liquidity is the point. Businesses need to move to the next stage of thinking about working capital management. Look at this as a collaboration with both their supplier trading partners and their buying trading partners. Leverage the benefit of being in the middle of the Supply Chain by Strategically Managing working capital on both the selling and buying side of your business. Also, embrace the “Time Value of Money” in your thinking. Realize and manage the current cost of capital over time and more importantly the “Tension” between buyers and suppliers for liquidity. Reduce risk in your part of the supply chain by establishing a very comprehensive business process for freeing up liquidity to your suppliers in exchange for discounts or by extending terms with the offer for them to auction their receivables. The supplier gets access to liquidity early by giving up a discount. Also, look at your selling side of your business and offer your buyers/customers early payment discounts and consider a strategy for auctioning your own receivables to bring in payments faster. In this economy, as the tension around Suppliers wanting to be paid early and Buyers wanting to hold onto capital there is a great opportunity which has opened up. This opportunity will give you a effective business strategy that will actually improve your overall working capital position because you will have established a very comprehensive capital management process and you will free up liquidity which has been tied up in an old way of thinking. Establish this comprehensive strategy and you will not only improve your position in the current economy, but you will emerge from this down turn even stronger than your competition. Be the leader in your industry and in your part of the supply chain by Strategically Managing Working Capital and freeing up liquidity not only for yourself but for your trading partners in the supply chain that need alternatives to survive this downturn.
Starting a Liquidity Strategy:
1. Measure closely your current working capital situation on both the buying side and selling side of your business. Look for areas of improvement.
2. Look closely as your supply chain partners, those you buy from and those you sell to. Implement flexible programs to help free up liquidity between these partners taking advantage of the current economies impact which has limited liquidity.
3. Carefully establish your own cost of capital and then leverage this to those partners that need liquidity.
4. If you find yourself in a strong cash position, with low cost of capital and partners who need liquidity, use the “Time Value of Money” to share your liquidity with them in exchange for a discount in purchases and in the form of extended payment terms to your customers in exchange for a premium payment.
5. Finally, establish a portfolio of Working Capital Solutions and processes and mix and match these to optimize your ability to leverage your position in the supply chain. Do this on an open B2B eCommerce Platform like the Ariba Network, our Discount Management tools and our partner, The Receivables Exchange, so that you can take advantage of automation of payables and receivables which extends the liquidity opportunity relative to the TIME part of “Time Value of Money”.
Some other Blogs about Liquidity:
Ariba Working Capital Management - http://www.ariba.com/solutions/workingcapital.cfm
The Receivables Exchange - http://www.receivablesxchange.com/opencms/opencms/ariba/index.html
Sr. Director, Network & Financial Solutions