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How Procurement Can Help Finance Optimize Payables Value

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Spend Matters welcomes this sponsored article from Sean Van Gundy, managing director, working capital advisory at C2FO.

Payment terms standardization, terms extensions, P2P automation and dynamic discounting programs are all trending topics with global corporates these days. These tactics can be effective at improving payables value, but what’s the best strategy to achieve your desired results?

Many industries are currently seeking to extend payment terms as a way to improve working capital and drive incremental and real benefit for their internal organizations. However, extending payment terms is not a panacea for automatic value especially if it causes undue financial stress on your company’s supply chain. It is important for companies to take an ethical approach to any extension strategy and provide suppliers with options to accelerate payment when they need it.

There are other value-add opportunities within the supply chain, and these can often be uncovered when your company works to thoughtfully standardize its payment terms before making the decision to go the terms extension route.

Companies can realize significant benefits from a five-pronged approach to optimizing working capital from the payables side of the equation:

1. Plan with Key Department Stakeholders

Start by identifying the departmental stakeholders who will need to be involved. You will need to include accounts payable and procurement from the start, and ultimately treasury and finance will need to weigh in on the supply chain finance tools your company makes available. Then these teams must collaborate to decide on the approach to data extraction and analysis that makes the most sense for your business objectives. Finally, you must plan for implementation, making sure you will be able to establish any new terms standards without harming your supply base.

2. Obsess Over the Supply Chain Data Analysis

It is vital that you start by pulling and analyzing the purchasing process data you currently have. That’s because any large corporation with a long purchasing history will inevitably have hundreds of unique payment terms combinations for their suppliers and you need to know exactly what your payment terms landscape looks like before you move to change it. Viewing your data will also help you decide how to logically organize your company’s spend.

3. Let Your Supply Chain Trends Drive Payment Terms Standardization

Once you have viewed and organized your purchasing data, you should begin to see consistent trends taking shape for each supplier segment. Don’t attempt to follow some elusive “industry standard” for terms; as a large buyer, your supply chain is the industry for all intents and purposes. Look at your financial needs for each spend segment and consider how many suppliers would need to change their terms and by how much to meet your goals. That will help you decide where to move payment terms. Ideally, you’ll want to end up with a smaller number of unique payment terms overall, and perhaps even a menu of choices by segment.

4. Implement the New Payment Standards

Now you will need to plan how to move each affected supplier segment to the new terms. Your analysis of the spend segments will help you ensure that you’re handling each one fairly as you decide the best way to communicate the adjusted terms and avoid supply chain disruption. For strategic suppliers, you will probably want to have individual meetings. For other segments, you need to communicate terms changes using a multi-touch communications approach to provide details and timing of the new payment standards. To avoid having suppliers raise their prices to offset longer terms, this is a good time to offer them an avenue where they can adopt the new terms but also enroll in an early payment solution at a reasonable cost to lessen the impact of the transition.

5. Always Consider Your Supply Chain Health

Standardizing payment in a manner that is fair to the supplier is paramount to being a good business partner, so it’s important to take your suppliers’ needs into account when making any kind of payment terms adjustment. Pairing terms standardization with a technology-enabled dynamic discounting program produces an environment that makes suppliers more inclined to accept terms standardization. In this way, your company benefits from full terms for suppliers that can wait to be paid and also via ongoing cash discounts throughout the year. If your holistic supply chain finance program options can offer your suppliers funding at less than their cost of borrowing, you can improve your business relationship by freeing up their working capital so they can focus on real value-add items.

Keep in mind that this is not a one-time process. It’s important to constantly assess and reassess your payment standards, and collaborate with suppliers to evolve your programs over time.

The last thing buyers want is to cause a supplier financial hardship because of their own financial needs. An ideal strategy focuses on aligning payment terms with your business objectives, streamlining technology to optimize early payments and keeping the lines of communication open with suppliers to ensure success.

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First Voice

  1. Haley:

    Great point on supplier relationship management. Improving your payment standards is critical for success and agility.

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