How Corporate Governance impacts Trade Credit David Gustin - February 11, 2014 6:38 AM | Categories: | Tags: Corporate Governance, Payment terms The Governance model to me is something that is important to understand at each Corporation. The relationship between the people who run the company and how it manifests itself in the operations and execution of the company are the most important things about business. The CEO is not telling the Procurement people what decisions to make or how to price the business or what payment terms to pay suppliers. The manifestation of that is by policy. To understand why people do things you have to understand the Governance model. Governance can impact Intercompany sales, Sourcing strategies, Procurement decisions, etc. One of the key Governance areas is a corporation’s policy around Payment Terms. There are several components: Establishing a Payment Policy Does the company have a policy around payment terms (types and tenors); how was it formed; who oversees it; how often is it reviewed and is there a formal policy to review it? Prepayment Policy What is the policy on funding vendors before shipment? Currency Does the company have a policy about sourcing in currencies other than USD or Euro? Funding What is the policy around how corporation’s capital (cash, loans, etc.) will be used to finance purchases? My esteemed colleague Pierre Mitchell, Chief Research Officer of SpendMatters, pointed out to me that he has talked to a lot of corporations on this subject. He summarized his discussions by saying Procurement likes early-pay discounts in theory, but only when: it gets credit for the savings it doesn't have to spend a lot of cycles dealing with supplier grief – especially when it coincides with the attempted DPO stretch and terms conversion (to get better total 'available discount'). it is attractive relative to other projects. Not only is there a big effort with terms conversion, especially when trying to rationalize dozens or even hundreds of unique payment terms, but the eInvoicing capability is still fairly weak, regardless of their supplier portal But the really big problem is that Finance is often a slave to DPO and DWC more broadly. Finance must answer to Wall Street, and Wall Street likes strong working capital. It is one of the principle factors in valuing companies. Pierre went on to say that you need an enlightened treasurer and CFO working together with Procurement to see the net opportunity of SCF. Most vendors just want a simple story regarding how their einvoicng or dynamic discounting solution helped a client. But the reality is to start the selling process, vendors must first begin to understand the Governance process. Related Articles Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of new posts by email.