Are Treasury’s Liquidity Models Preventing More Uptake in Dynamic Discounting?

You'd think corporate treasurers would be all over investing surplus operating cash into their early pay programs, especially in this day of both negative interest rates and the upcoming Securities and Exchange Commission money market rules floating the net asset value of institutional money market funds.

The operational requirements of treasury deploying cash in early pay and the relative return of that cash is driven by interest rates. If interest rates are 35bps for investing cash for 180 days, there’s no question an early pay construct from a risk managed perspective seems clear. So why do companies continue to hold fast and true to liquidity models with high hurdles?

In prior discussions with corporate treasury around investing surplus operating cash into supply chains, I’ve found that hurdle rates have been set arguably too high.

I believe there are at least three reasons for this:

  1. A concern about committing their own cash in a material way to fund their supply chain, impacting DPO negatively and being viewed as a banker to their suppliers. Companies understand funding suppliers early is not something to do one month but not the next. It is a commitment.
  2. The reward structure for treasury does not give it an incentive to be aggressive with early pay solutions. Companies, and the people that run them, are very rational. If there is no clear incentive to do so, they will not pursue early pay solutions.
  3. Models are based on looking at cash as a resource. Large company cash priorities are focused on managing the balance sheet and having options. Those options could be share repurchases, committing to dividends, M&A or research.

The Times They Are A-Changin'

But it seems times are changing a bit. Recently, I had an opportunity at Taulia Connect to speak with a few treasury and finance folks around how they set their rates for funding programs.

In one case, Milliken uses Greensill Capital as its funding partner. Because Greensill requires an arms-length arrangement in setting pricing, it uses multiple APR pools based on supplier credit ratings and suppliers weighted average cost of capital, if that can be estimated.

In another case, an instrumentation company sets its APR to its cost of capital. The company finds that self-funding programs is a balancing act between reducing DPO versus making a return on surplus short-term cash. So the model both analyzes a cash commitment ceiling that minimizes DPO impact while maximizing supplier take-up. The model is essentially a course in Optimization 101. (I mostly slept through that in college. I knew I shouldn’t have scheduled 8 a.m. classes.)

So as companies look to leverage their accounts payable investment in e-invoicing and supplier network solutions to enable more dynamic discounting and third party financing, understanding how you determine pricing and cash commitments to a program are extremely important.

It’s one thing justifying programs based on rebate income. But it’s another to put programs to the test with half a dozen other, often dynamic variables tossed into the equation. Now go optimize that!

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