It’s Time To Start A Treasury Hunt

Chris Rauen

Today, many large organizations have growing cash balances, but don’t earn much on that cash.  At the same time, many small to midsize companies with which they do business have the opposite problem. They need cash to fund operations.

Herein lies an opportunity.

Historically, managing cash and working capital has been challenging for trading partners. The customer would prefer to delay payment, while the supplier would like to get paid sooner. In a digital economy, however, new opportunities exist to collaborate around payment timing to the mutual benefit of both trading partners. And the treasury organization can play a vital role in making this happen.

A recently published e-book from the specialized treasury consulting firm Strategic Treasurer, Leading Practices for Treasury in the Financial Supply Chain, provides valuable insights for treasurers as they strive to determine optimal levels of working capital. As the e-book explains, finding the right balance can be complicated.

The primary concern for many treasurers may be too little working capital to support business operations. Too much working capital, though, can likewise prove a drain on the business, limiting the potential returns on short-term cash investments.

For example, the double-digit cash returns from early-payment discounts are among the best uses of short-term cash, and there’s no risk associated with these investments. But when treasury is obsessed with days payable outstanding (DPO), these discounts may be ignored.

Control the cash

That changes when treasury understands the controls they have over their cash. It includes:

  • Defining the amount of cash to apply to the program
  • Determining the hurdle rate, or minimum rate of return from these discounts
  • Limiting time periods for when the program is active
  • Identifying which suppliers to include in the program

What about those treasury organizations more concerned with improving days payable outstanding (DPO)? Here, a supply chain finance program is a good fit. The buyer continues to pay at the invoice due date, while a third-party financial institution accelerates payment to the supplier for a small fee, using the buyer’s lower cost of capital. That’s a win-win for buyers and their suppliers.

Another key to success with these programs is efficient invoice processing. If it takes weeks to process an invoice, you can’t take advantage of early-payment discounts, or even pay your suppliers on time. With electronic invoicing, you can process invoices in a few days, and free up AP staff to support procurement and treasury as they look to better manage corporate spending, cash, and working capital.

With today’s modern financial supply chain, trading partners can collaborate more effectively to overcome traditionally conflicting cash management and working capital objectives. It’s an opportunity that should motivate more treasurers to begin their hunt for savings.

For more on treasury best practices, read this complimentary e-book from the specialized treasury consulting firm Strategic Treasurer: Leading Practices for Treasury in the Financial Supply Chain.

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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.