Will The Fed Doom Your Working Capital Program?

Scott Pezza

News of increasing interest rates has led to questions about what it might mean for both buyers and suppliers when it comes to the costs of borrowing and financing their businesses. One area where this concern rises is in working capital management programs focused either on self-funded early-payment discount programs or third-party-funded supply chain finance arrangements. Will higher interest rates make these programs more difficult to execute? Do strategies need to change greatly?

The short answer is no, but let’s walk through the details to understand the issue, the impact, and what you can do to mitigate any risk to program success.

Just the facts

Interest rates are going up. In announcements on December 14, 2016, and March 15, 2017, the U.S. Federal Reserve raised its target for the federal funds rate (FFR) by 25 basis points (one-quarter percent), from 0.5% to 0.75% and then on to 1.0%. Members of the Fed’s Board of Governors have shared their views that multiple additional increases will (or should) happen in 2017. That could result in a fed funds rate of 1.5% or more by the end of the year. But why does that matter?

The fed funds rate is the interest rate at which banks can borrow from each other, typically during overnight trading, to maintain required reserve balances. When their borrowing rates go up, yours likely will as well. In the U.S., the prime rate follows closely along with changes in the fed funds rate. All sorts of borrowing, from consumer home mortgages to business lines of credit, are based on (or “indexed to”) the prime rate, with an added margin on top. For instance, a $20,000 line of credit for a small business might come with an interest rate of prime + 9.0%. As the prime rate goes up, so does the interest rate on the portion of the credit line in use.

A global concern

This issue is not unique to the U.S., of course. Loans throughout the world, including some in the U.S., can be indexed to LIBOR, or the London Interbank Offered Rate. Again, it is the rate at which banks loan money to each other and directly influences the rates at which they loan to you. In working capital programs, we most often see this rate in relation to supply chain finance offers, which are quoted at one-month LIBOR plus some percentage – typically 2% at present. LIBOR has been consistently close to the fed funds rate: it was 0.99% in April (compared to 1.0% FFR), and was 0.43% a year ago when the federal funds rate was 0.50%.

Impact on working capital programs

When thinking about working capital programs and the potential impact of rising interest rates, we want to look at the issue from both the buyer’s and supplier’s perspective. Here’s how that breaks down:

  • The buyer. Your borrowing costs are going up slightly. If you had been making money on the margin in between your borrowing rate and the rate of return you could get from early payment discounts (say borrowing at 10% to generate 20% APR returns), then your margin has narrowed. Rising interest rates also mean that the potential returns on idle cash invested in money market funds, bank deposits, and other instruments go up, again decreasing the margin of a discount program over passive short-term investments. You will want to keep an eye on these changes to know if you’ll need to raise your discount term APRs to preserve your margins.
  • The supplier. For suppliers that depend on finance indexed to these benchmark rates, their borrowing costs are going up as well. Even larger suppliers that can issue commercial paper or other corporate debt to raise capital will face upward pressure on the borrowing rates they would pay to compete with higher rates on treasury bonds. Existing discount rates would become a little bit more attractive (unless you raise them), as the difference between your APR and their borrowing rate grows. Supply chain finance (SCF) rates, because they are indexed as well, may be slightly less attractive to your top suppliers, if the gap between SCF and their other funding options was narrow to begin with.

So, where does that leave us? Suppliers may be more likely to find discount terms more attractive because they do not automatically go up alongside interest rates. This is especially true for suppliers that have already agreed to a fixed APR for dynamic discounting, where they hold the option of accelerating payment on an invoice-by-invoice basis. Some larger suppliers with stellar credit may be somewhat less likely to engage in a supply chain finance program where it was a close call previously. Suppliers – especially those borrowing at indexed rates – will experience borrowing-cost increases, so while the numbers change a bit, the business value of these programs does not.

Your next steps

While these interest rate changes will likely have minimal impact on your working capital programs, there are a few things that you can do to ensure that you make informed decisions in this area:

  • Talk to treasury about borrowing costs and hurdle rates. If your costs are going up and eroding your margins on discounts, you may wish to increase the effective APR of your discount terms when negotiating contract renewals and onboarding new suppliers. The same logic applies if these higher interest rates make alternative investments more attractive: You may need to raise discount APRs to keep pace.
  • Review your supply base to identify suppliers with strong credit ratings who may not have the appetite for higher discount or supply chain financing rates. While it may be an exceptional case where a percentage-point difference in rates swings a supplier’s decision-making, it is a possibility – especially at the top end of your base. Understanding which suppliers might be affected can help you get out in front of the conversation or lead to the strategic decision to absorb the rate increase and accept your own lower margin rather than attempting to pass it on.
  • Don’t panic. While rates are beginning to increase, and very well may continue throughout the year, they are still at historic lows. That’s why the impacts are really only in exceptional cases on the margins, where small changes can push a supplier over what’s already close to its limit. For the vast majority of your supply base, these increases won’t change their decision-making one way or the other at this time.

Wrapping up

While it’s true that interest rates have risen moderately and are expected to continue to do so throughout the year, the cause for concern when it comes to your working capital management projects is minimal. Nevertheless, there are a few questions you can ask, and a few steps you can take, to mitigate these potential impacts. If nothing else, this provides a great opportunity to make sure that accounts payable, procurement, and treasury are in close communication so that any necessary changes can be done in an informed and aligned manner. That collaboration is a best practice itself, and now is as good a time as any to make sure that it’s in place.

For more insights into the challenges and opportunities for today’s treasurers, read this complimentary report from specialized treasury consulting firm Strategic Treasurer: “Leading Practices for Treasury in the Financial Supply Chain.

 Follow SAP Finance online: @SAPFinance (Twitter) | LinkedIn | Facebook | YouTube


Scott Pezza

About Scott Pezza

As part of SAP Ariba’s Nework Value Organization Center of Excellence, Scott researches, compiles, and shares best-practice information to help customers get the most out of their investments. With a focus on the financial supply chain (invoice management, payments, discounting, and supply chain finance), his research helps inform strategic planning, performance measurement, and program execution. He has spent the past 15 years in the B2B technology space, in roles ranging from software development and support to research and consulting. Scott earned his BA in English and Philosophy from Clark University, his MBA from Boston University Graduate School of Management, and his JD from Boston University School of Law, where he served on the Executive Board of the Annual Review of Banking and Financial Law.

The CFO Role In 2020

Estelle Lagorce

African American businessman looking out office window --- Image by © Mark Edward Atkinson/Blend Images/CorbisThe role of the CFO is undergoing a serious transformation, and CFOs can expect their role to continue to evolve, according to a recent CFO.com article by Deloitte COO and CFO Frank Friedman.

In the futurist article, Friedman says one of the biggest factors that will contribute to the CFO’s significant change over the next five years is technology.

Digital technology is obviously expected to drive change in high-tech companies, but Friedman says it’s industries outside of the tech sectors that are of particular interest, as they struggle to understand how to grasp and harness the digital capabilities available to them.

Working with high tech in low-tech industries

Five years from now, a finance team may be defined by how well it uses technology and innovative business tools, regardless of what industry it’s in. The article outlines some examples of ways that digital technology will increasingly be used by CFOs in “non-tech” sectors:

  • Predictive analytics: CFOs in manufacturing companies can forecast results and produce revenue predictions based on customer-experience profiles and current demand, instead of comparing to previous years as most companies still do today.
  • Social media and crowdsourcing: You may not think CFOs spend a lot of time on social media or crowdsourcing sites, but these methods can actually expedite finance processes, such as month-end responsibilities of the finance organization.
  • Big Data: CFOs already have a lot of data at their fingertips, but in 2020 they will have even more. CFOs in both tech and non-tech sectors who understand how to use that data to make valuable, informed decisions, can strategically guide their company and industry in a more digitally oriented world.

To do this, Friedman says CFOs can lead the way by addressing some critical areas:

  1. Know the issues: Gather the key questions that leaders expect Big Data analytics to answer.
  1. Make data easily accessible: Collect data that is manageable and easy to access.
  1. Broaden skills: The finance team needs people with the skills to understand and strategically interpret the data available to them.

The tech-savvy CFO

The role of today’s CFO has already expanded to include strategic corporate growth advice as well as managing the bottom line. In 2020, Friedman says expectations placed on the CFO are presumed to be even greater, and CFOs will likely need a much more diverse, multidisciplinary skill set to meet those demands.

The article details several traits and skills that CFOs will need in order to keep up with the pace of digital change in their role.

  1. Digital knowledge: CFOs must be tech-savvy in order to capitalize on technical innovations that will benefit their company and their industry as a whole.
  1. Data-driven execution: CFOs will need the ability to execute company strategy and operations decisions based on data-driven insights.
  1. Regulatory compliance: Regulations continue to be more stringent globally, so CFOs will need to be proficient at working closely with regulators and compliance systems.
  1. Risk management: With the growing global economy comes increased cyber and geopolitical risks worldwide. The CFOs of 2020, especially those in large multinational organizations, will need to have the expertise to monitor and manage risk in areas that may be unforeseen today.

The future CFO’s well-rounded resume

By 2020, the CFO role will require much more than just an accounting background. According to Deloitte’s Frank Friedman, “CFOs may need to bring a much more multidisciplinary skill set to the job as well as broader career experiences, from working overseas to holding positions in sales and marketing, and even running a business unit.”

So if you’re a current or aspiring CFO, you have five years to round out your resume with the necessary skills to be ready for the digitally driven role of the CFO in 2020.

The above information is based on the CFO.com article What Will the CFO Role Look Like In 2020?” by Deloitte COO & CFO, Frank Friedman – Copyright © 2015 CFO.com.

Want to learn more about best practices for transforming your finance organization? View the SAP/Deloitte Webinar, “Reshaping the Finance Function”.

For an in-depth look at digital technology’s role in business transformation, download the SAP eBook, The Digital Economy: Reinventing the Business World.

To learn more about the business and technology factors driving digital disruption, download the SAP eBook, Digital Disruption: How Digital Technology is Transforming Our World.

To read more CFO insights from a tech industry perspective, read the Wall Street Journal article with SAP CFO Luka Mucic: Driving Insight with In-memory Technology.

Discover 7 Questions CFOs Should Ask Themselves About Cyber Security.


Estelle Lagorce

About Estelle Lagorce

Estelle Lagorce is the Director, Global Partner Marketing, at SAP. She leads the global planning, successful implementation and business impact of integrated marketing programs with top global Strategic Partner across priority regions and countries (demand generation, thought leadership).

Get Your Payables House In Order

Chris Rauen

First of 8 blogs in the series

Too many organizations ignore the business potential from streamlining accounts payable operations. In a digital economy, however, this may represent one of the best opportunities to improve financial performance and boost the bottom line.

In its recent report, E-Payables 2015: Higher Ground, the research and advisory firm Ardent Partners made a strong case for accounts payable transformation. “In 2015, more AP groups are accelerating their plans to transform their operations and scale to new heights,” states the report.

The digital makeover

From a payables perspective, how you go about fixing outdated procure-to-pay (P2P) practices is much like the decision to improve an aging home. Do you tear your house down and build a new one, or leverage as much of the existing structure as you can and begin a major home improvement project?

There is, of course, a third option. Take no action and make calls to plumbers, electricians, roofers, and other specialists as needed before the house falls apart altogether. While few organizations would consider a “triage” strategy the best option to address deficiencies in P2P operations, many still do. (Just don’t share that with your CFO.)

This blog post is the first in a series that will examine options for upgrading procure-to-pay processes from outclassed to best-in-class. Continuing to focus time and effort on managing transactions just doesn’t make sense. With today’s business networks, organizations have new ways to collaborate with suppliers and other partners to buy, sell, and manage cash.

Automation handles low-value activities, eliminating data entry, exception management, and payment status phone calls. That leaves more time for benchmarking operations, monitoring supplier performance, expanding early payment discounts, and improving management of working capital – the kinds of things that can dramatically improve business performance.

Where do you start?

To begin, you have to recognize that getting your payables house in order is much more than a process efficiency initiative. While cost savings from e-invoicing can be 60% to 80% lower than paper invoicing, there’s much more to the business case.

Improving contract compliance and expanding early payment discounts are other components of a business case for P2P transformation. According to various procure-to-pay research studies and Ariba customer results, the cost savings from getting your payables house in order are conservatively estimated to be $10 million per billion collars of spend. We’ll break down these ROI components in greater detail in future posts on this topic.

The value of alignment

Another important first step, validated by the Ardent Partners report, is getting procurement and finance-accounts payables in alignment. As this is a holistic process, you’ll need to make sure that both organizations are in sync, and you have support from upper management to make it happen.

Now, back to the question: Do you approach a payables makeover to support P2P transformation as a tear-down or a fixer-upper? If your procurement-accounts payable teams are out of alignment, your P2P processes are predominantly paper, and decentralized buying leaves little control over spend, you’re looking at a tear-down to lay the foundation for best practices payables. We’ll share a blueprint with you in the next post in this series.

Chris Rauen is a solution marketer for Ariba, an SAP company. He regularly contributes to topics including e-invoicing and dynamic discounting as well as the value of collaborating in a digital economy. 

Learn more about how to take your payables to the next level of performance in Ardent Partners’ research report “E-Payables 2015: Higher Ground.


Chris Rauen

About Chris Rauen

In his role at SAP Ariba, Chris Rauen educates procurement, finance, and shared services professionals on the business value of accounts payable automation, procure-to-pay transformation, and collaboration via business networks. Chris has addressed these topics at finance and shared services conferences, in articles for trade and business publications, and in blogs for online communities. Chris has more than 15 years of experience in e-payables, and holds a B.A. in Economics from the University of California, Santa Barbara.

Human Skills for the Digital Future

Dan Wellers and Kai Goerlich

Technology Evolves.
So Must We.

Technology replacing human effort is as old as the first stone axe, and so is the disruption it creates.
Thanks to deep learning and other advances in AI, machine learning is catching up to the human mind faster than expected.
How do we maintain our value in a world in which AI can perform many high-value tasks?

Uniquely Human Abilities

AI is excellent at automating routine knowledge work and generating new insights from existing data — but humans know what they don’t know.

We’re driven to explore, try new and risky things, and make a difference.
We deduce the existence of information we don’t yet know about.
We imagine radical new business models, products, and opportunities.
We have creativity, imagination, humor, ethics, persistence, and critical thinking.

There’s Nothing Soft About “Soft Skills”

To stay ahead of AI in an increasingly automated world, we need to start cultivating our most human abilities on a societal level. There’s nothing soft about these skills, and we can’t afford to leave them to chance.

We must revamp how and what we teach to nurture the critical skills of passion, curiosity, imagination, creativity, critical thinking, and persistence. In the era of AI, no one will be able to thrive without these abilities, and most people will need help acquiring and improving them.

Anything artificial intelligence does has to fit into a human-centered value system that takes our unique abilities into account. While we help AI get more powerful, we need to get better at being human.

Download the executive brief Human Skills for the Digital Future.

Read the full article The Human Factor in an AI Future.


Dan Wellers

About Dan Wellers

Dan Wellers is founder and leader of Digital Futures at SAP, a strategic insights and thought leadership discipline that explores how digital technologies drive exponential change in business and society.

Kai Goerlich

About Kai Goerlich

Kai Goerlich is the Chief Futurist at SAP Innovation Center network His specialties include Competitive Intelligence, Market Intelligence, Corporate Foresight, Trends, Futuring and ideation.

Share your thoughts with Kai on Twitter @KaiGoe.heif Futu


How Manufacturers Can Kick-Start The Internet Of Things In 2018

Tanja Rueckert

Part 1 of the “Manufacturing Value from IoT” series

IoT is one of the most dynamic and exciting markets I am involved with at SAP. The possibilities are endless, and that is perhaps where the challenges start. I’ll be sharing a series of blogs based on research into knowledge and use of IoT in manufacturing.

Most manufacturing leaders think that the IoT is the next big thing, alongside analytics, machine learning, and artificial intelligence. They see these technologies dramatically impacting their businesses and business in general over the next five years. Researchers see big things ahead as well; they forecast that IoT products and investments will total hundreds of billions – or even trillions – of dollars in coming decades.

They’re all wrong.

The IoT is THE Big Thing right now – if you know where to look.

Nearly a third (31%) of production processes and equipment and non-production processes and equipment (30%) already incorporate smart device/embedded intelligence. Similar percentages of manufacturers have a company strategy implemented or in place to apply IoT technologies to their processes (34%) or to embed IoT technologies into products (32%).

opportunities to leverage IoTSource:Catch Up with IoT Leaders,” SAP, 2017.

The best process opportunities to leverage the IoT include document management (e.g. real-time updates of process information); shipping and warehousing (e.g. tracking incoming and outgoing goods); and assembly and packaging (e.g. production monitoring). More could be done, but figuring out where and how to implement the IoT is an obstacle for many leaders. Some 44 percent of companies have trouble identifying IoT opportunities and benefits for either internal processes or IoT-enabled products.

Why so much difficulty in figuring out where to use the IoT in processes?

  • No two industries use the IoT in the same way. An energy company might leverage asset-management data to reduce costs; an e-commerce manufacturer might focus on metrics for customer fulfillment; a fabricator’s use of IoT technologies may be driven by a need to meet exacting product variances.
  • Even in the same industry, individual firms will apply and profit from the IoT in unique ways. In some plants and processes, management is intent on getting the most out of fully depreciated equipment. Unfortunately, older equipment usually lacks state-of-the-art controls and sensors. The IoT may be in place somewhere within those facilities, but it’s unlikely to touch legacy processes until new machinery arrive. 

Where could your company leverage the IoT today? Think strategically, operationally, and financially to prioritize opportunities:

  • Can senior leadership and plant management use real-time process data to improve daily decision-making and operations planning? Do they have the skills and tools (e.g., business analytics) to leverage IoT data?
  • Which troublesome processes in the plant or front office erode profits? With real-time data pushed out by the IoT, which could be improved?
  • Of the processes that could be improved, which include equipment that can – in the near-term – accommodate embedded intelligence, and then communicate with plant and enterprise networks?

Answer those questions, and you’ve got an instant list of how and where to profit from the IoT – today.

Stay tuned for more information on how IoT is developing and to learn what it takes to be a manufacturing IoT innovator. In the meantime, download the report “Catch Up with IoT Leaders.”


Tanja Rueckert

About Tanja Rueckert

Tanja Rueckert is President of the Internet of Things and Digital Supply Chain Business Unit at SAP.