We all know that Buyers want to hold on to cash and Suppliers want to be paid early. It's the age old problem, but what to do? Find Tools to not only reduce your "Working Capital Days", but balance that with lowing your cost of captial. It's not just about DPO and DSO anymore. You must re-think these based on "The Time Value of Money"
The "Time Value of Money" tools on the Ariba Network can drive an answer to today's most serious business problem - Low Cost Liquidity. Cash Management isn't just important, it is now the difference between survival and bankruptcy. A very smart CFO told me just a few days ago, before this economic down turn most people were not looking at cash management so closely and if they needed capital they would go to their bank or to Wall Street. But, he said, today the doors at Wall Street are closed and the Banks have almost forgotten how to lend. So what to do? First start re-learning how to manage your cash and your cash tied up in your receivables. Second, shift your thinking to "The Time Value of Money".
My 15 year old daughter came to me and said, "Dad, can I have my allowance early this month?" Like typical fathers, I said, "Why?" She said there is a sale at the mall on jeans and she doesn't want to miss out. She knows me so she said, "Dad, if I buy the jeans now, I can save money.....20%" I thought for a second and responded, "Ok, I'll give you your money early but I get to keep 5% of the allowance for giving it to you early!" She paused and looked at me like I was an alien. I asked her, how much are you willing to give up to get your money early? She paused again as her brain started processing the concept of giving up a little money to get a bunch of cash early and how this would help her get her discount. She was learning, "The Time Value of Money". What did she decide, she took the money less 5% and bought the jeans on sale.
My daughter is like many suppliers in the market today, if they could get liquidity earlier they could invest it back in their business and either take advantage of a discount in inventory they were already going to buy, or to invest in growting their staff as is critical to many consulting, services and contingent labor businesses. It isn't wrong to look for early payment and it is natural to exchange this for a small discount based on a reasonable cost of capital. Why did my daughter come to me? Because the banks won't lend her money. Why do suppliers come to their buyers for early payment or to services like the Receivables Exchange? Same reasons, the banks won't lend them money. Start thinking "Time Value of Money" and stop thinking about just simple price and cost. The supply chain needs you. One estimate has the current capital tied up in US base corporations as greater than $1 Trillion. Wow, image what would happen if this was unlocked in exchange for a discount. Buyers would drop the cost savings to their bottom line and suppliers/sellers would be able to grow again, hire, make stuff.
There is only one tool today for my daughter and it's called Dad's wallet. But for small to medium sized suppliers, there are a number of working capital solutions at your disposal. Early payment discounting and Receivables Financing being two of the most efficient tools today. So, I'll give my daughter her $50 less $2.50 which will go to my bottom line this month. I suggest you strongly consider moving to Early Payment Discounting and Receivables Financing like The Receivable Exchange. See a great description of what they do and how they help here at CNN.COM -http://money.cnn.com/video/news/2010/02/12/n_receivables_exchange.cnnmoney/
Buyers and Suppliers come in all sizes and find themselve in many different liquidity situations. Large Buyers in today's economy are looking to extend payment terms by establishing new pre-negotiated payment terms, Net 45 or Net 90, with their suppliers. Buyers are looking to grow their float and increase their DPO - Days Payables Outstanding. It makes them look good on their books. This is causing huge problems in the supply chain and world economy as it is locking up huge amounts of cash within buying organizations. Everything slows. Small to Medium size supplier talk to us every day when they call our Ariba Supplier Network team. They are struggling to keep their doors open. All they need is short-term liquidity. The liquidity held by their customers because of extended payment terms.
So, how do you solve this. Here is how. You give the small to medium size suppliers an alternative to cash, at a low cost and in an very efficient way. So, buyers if you are going to keep your long payment terms, or you have plans on pushing your payment terms out to your suppliers it is in your best interest to offer you suppliers to very powerful tools. Tools that are good for them and good for you. Discount Management tools like thos from Ariba which allow you to pay your supplier early in echange for a discount on the amount due. We provide a hurdle rate setting to ensure this savings always exceeds your current cost of capital, so it gives you a better return than if you hold on to your cash. Second, and maybe the most simple way is to provide them a second tool. Offer them The Receivables Exchange, which gives them an independent way to sell their receivables which offers them a low cost way to get liquidity and allows you to still hold onto your cash. Both solutions are even more efficient and more valuable to both buyers and suppliers if you join the Ariba Network since we speed up the PO to Invoice to Pay cycle you will have a greater "Time Value of Money" equation working in your favor. A faster and more efficient supply chain on the Ariba Network means a lower cost of doing business and a greater ability to manage your Working Capital needs.
You have seen a few other blogs from me around "The Time Value of Money", which focuses on efficient Cash Management. I'll continue to share that I feel the tension between buyers and suppliers, buyers wanting to hold onto their cash and suppliers wanting to be paid early, will never go away. But it will become more efficient and benefitial as you adopt key techologies like Discount Management and Receivables Auctioning both available now on the Ariba Network.
Ariba offers some White Papers to learn more: http://www.ariba.com/solutions/workingcapital.cfm
Transforming A/P Managers into Working Capital Heroes