Shaping a fintech-based working capital strategy is the future for businesses

The archaeological record shows that written invoices are as old as civilisation itself. While we no longer use clay tablets for our recordkeeping, it wasn’t until recent years that we moved beyond the paper invoices and cheques that represented a fairly minor evolution of the process. Technological advances are rapidly increasing in sophistication, with most companies now using virtual cards, EDI and automated AP workflow processes.

Early adopters are increasing their use of electronic invoicing and procurement, online and mobile payment systems (particularly for B2B and small business) and payment gateway APIs. The most innovative companies have led the way in exploring cutting-edge supply chain finance programmes including marketplace-enabled dynamic discounting supported by systems of AP process and records standardisation.

Why leveraging your supply chain is a sound working capital strategy

Treasurers have found it increasingly challenging to manage the financial infrastructure of large corporations since the most recent financial crisis. Today large corporates are holding record amounts of cash reserves. The risk there is that it’s more difficult than ever for them to maximize short-term returns because market rates have dipped to levels that no longer produce acceptable returns, especially when you consider added fees.

On the other hand, small and medium-sized enterprises (SMEs) are having difficulty accessing affordable working capital for their routine operations and growth.

When you have big corporations with excess cash on their balance sheets and SMEs unable to get affordable access to the liquidity they need to operate, the entire economy suffers. However, forward-looking financial professionals can turn the situation into an opportunity that lies within their supply chain.

Fintech innovations can help shape cash management in new and different ways by supporting and improving upon current financial tools.

Shaping a fintech-based working capital strategy

Most companies have certain programmes already in place to strategically leverage their supply chain to improve gross margins and manage cash. Generally, these programmes include extended payment terms and fixed cash discounts for early payment.

It’s important to put in the work of systematising programmes and processes within the organisation when developing a working capital strategy. Some of the steps include:
• Standardise discounting and terms: Over time, most companies have applied separate terms and discounts to individual suppliers that often vary significantly. Tallying them across the organisation makes them easier to manage.
• Provide a range of working capital options: Do not limit programmes to only your largest suppliers. Choose options that will include the SMEs that need early payment the most.
Weigh cost of goods tradeoffs: A fixed early payment discount may result in suppliers gradually adding the discounts back into the cost of goods, which will ultimately lessen improvements to your gross margin improvements.
• Offer simple programmes to encourage adoption: Avoid programs that involve complicated legal agreements between you and your suppliers. These are more expensive to implement and tend to decrease your suppliers’ adoption rates.

Why true dynamic discounting makes sense

Often companies will offer supply chain finance (SCF) for their large suppliers and P-Card programmes for small suppliers. The group of suppliers in the middle may find itself shut out.

Using a true dynamic discounting marketplace model can fill that gap between your largest and smallest suppliers. The entire organisation sees the benefits via improved margins and earnings before interest, tax, depreciation and amortization (EBITDA). As an added benefit, your supply chain is strengthened as suppliers get working capital when they need it at rates they choose.

Numerous large corporations such as Costco Wholesale, Pfizer, Mohawk Industries and ToysRUs are using the true dynamic discounting model to set aside strategic cash to make available as working capital to their suppliers in return for a small discount on approved invoices.

A successful true dynamic discounting programme is designed to maximize supplier participation, measured by the number of suppliers using it, their frequency of use, and its effectiveness in serving the needs of supplier businesses of all sizes. The aim is to create an environment that is sustainable over time and fair to both the supplier and the buyer.

Here’s how it works:
• Suppliers have the opportunity to submit early payment offers as needed to accelerate payment of invoices sooner than allowed by previously negotiated terms.
• Suppliers choose their desired rate for early payment and how often they use the programme, which reduces the risk of discounts being added back into the cost of goods over time.
• Buyers control their desired rate of return for paying their suppliers early.
• Buyers see an increase in cash discounts throughout the year as opposed to a one-time cash flow increase due solely to standardisation of terms.
• The programme is risk-free for buyers as they are investing in their own business.

Viewing the AP process holistically

Because buyers have so many choices for optimising their Accounts Payable process, it’s important to take into account how the tools will work together. Supply chain finance and P-Cards increase cash flow, while dynamic discounting, coupled with careful terms standardisation on the cash discount side, decreases cost of goods sold thereby improving gross margin.

A buyer obviously cannot enhance them both simultaneously because accelerating payments to capture additional cash discounts reduces Days Payable Outstanding. Similarly, terms extensions on the working capital side result in a reduction on cash discount capture.

However, is is possible for a large buyer to make improvements on both at the same time if they have all levers in place. Because not all suppliers will adopt a single programme, it’s still possible to optimise cash discounts and working capital. In all likelihood, a buyer will be fortunate if 25 % of the supply base chooses to use one of its existing early payment solutions. With no other tools in place, there is value in the AP process that is not being revamped.

When you implement all of the working capital tools available, you have the opportunity to allow your suppliers to select the most efficient way to transact business that makes the most sense for each of them individually and for your business as well.

About Colin Sharp:

Colin leads C2FO in EMEA and is responsible for customer success in the region. He has a strong track record with over 20 years’ experience in enterprise software. He has held leadership positions in some of the World’s most respected organisations such as Hyperion, Oracle and most latterly SAP where Colin spent the last 6 years in EMEA sales leadership roles and was a member of the SAP UKI Exec Board.

About C2FO:

C2FO is the world’s market for working capital and risk-free profit. C2FO is the largest working capital exchange in the world and enables companies to “Name your rate” for working capital in a live, bid/ask environment. Companies across the globe use C2FO to increase their operating income while simultaneously producing vital working capital flows to their supply chains. C2FO is a leader in retail, industrial, manufacturing, energy, healthcare, technology, telecom and transportation sectors. C2FO is collaborative cash flow optimisation.