Looking back on the year, have you been satisfied with the earnings on short-term cash?
I certainly haven’t. But businesses have an opportunity to increase their returns on cash with early-payment discounts, especially at year-end.
It’s easy to see why. Many cash-starved suppliers look to improve their cash flow at end-of-quarter and end-of-year fiscal periods. Early-payment discounts can do just that. Top performers are realizing $2 million to $3 million in discount savings for every $1 billion of spending.
That’s one aspect of payment timing, which was a popular topic over the past year on managing cash and working capital. On the flip side, there’s the opportunity to extend payment terms for organizations that may find themselves paying suppliers faster than their peers. One global pharmaceutical company extended payment terms by 15 days with tens of thousands of suppliers in 40 countries. That generated more than $330 million in free cash flow and contributed more than $10 million to the income statement.
What about suppliers that may want to get paid sooner, but their customers don’t want to use their own cash? That’s where supply chain finance from a third-party financial institution is a good fit.
These strategies for managing cash and working capital can help suppliers with their cash flow while also make valuable contributions to your financial results. However, for many organizations, early-payment discounts aren’t a priority. Neither is attention to payment terms.
That’s where our e-book, The Insider’s Guide to Improving Payments and Cash Flow, can be a valuable resource. It offers a comprehensive look at tactics and strategies to better manage payment timing, cash, and working capital. The fact that your competitors may be paying closer attention to this activity would be a good reason to act. As the e-book points out, if it turns out that you’re paying suppliers earlier than others in your industry, you are effectively financing their businesses.
Tell that to your treasurer. With a focus on days payable outstanding (DPO), your treasury group might not consider paying a supplier early in exchange for a discount. But treasury needs to understand that, in today’s digital economy, you can balance dynamic discounting and DPO management to increase earnings on cash from the discounts while simultaneously freeing up cash flow through payment terms extension.
Meanwhile, as you strive to maintain a healthy financial supply chain, conflicting objectives can get in the way. According to the Strategic Treasurer report, Leading Practices in the Financial Supply Chain, conflicting key performance indicators (KPIs) from treasury, AP, procurement, and sales can disrupt business operations and “make treasury’s task of managing working capital difficult.”
How are you dealing with these issues? If they aren’t yet top of mind, there’s still time in 2017 to consider a payment timing strategy that can turn your payables into a strategic asset, and help your suppliers with their cash flow, too.