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How to Inspire a Cash Flow Revolution: Insights from Taulia’s Working Capital Summit

10/24/2018 By

Investors, CEOs and suppliers are pushing procurement and finance organizations to improve working capital performance, and this renewed interest in the state of the balance sheet is poised to create a revolution in how businesses approach cash flow, according to Taulia, a provider of financial supply chain solutions.

There is $14 trillion in annual spend volume trapped in global supply chains, and for every $1 billion in revenue, working capital programs can create improvements totaling as much as $70 million, Taulia said last week at its 2018 Working Capital Summit in Chicago. Those eye-popping numbers translate into numerous opportunities for businesses, like funding innovative research, breaking into competitive new markets and lowering costs for suppliers and consumers.

The increasing pace of commerce and relentless disruption from new technologies are changing the game for how businesses approach working capital. Improving access to cash is no longer a nice-to-have benefit; going forward, optimized working capital may very well be essential to business survival.

“Working capital has been ignored for a long time in the corporate world,” said Cedric Bru, Taulia’s CEO, in his opening presentation. “We believe it’s time that should change.”

Working Capital: Changing Perceptions and Goals

In the past, businesses viewed cash flow as a governor to the business — a useful metric for maintaining financial operations but not a lever for innovation. Yet the current economic environment has brought with it new challenges that are changing legacy attitudes toward the balance sheet, said Nick Boaro, a partner at Ernst & Young who breaks the shift into two groups.

The first is companies in need of alternative financing strategies, as they have tapped out traditional avenues. These include early stage startups, which may not have the revenue or creditworthiness to attract outside capital, and also later-stage but distressed corporations.

The second is more stable companies that have long focused on the P&L side of their earnings but have driven most of the value they can from those areas. Because they’ve never applied much discipline to their balance sheet, this is naturally the next area to conquer.

Compounding this is rising interest from institutional investors in the balance sheets of public companies, the thinking being that cash flow is a useful metric for evaluating how efficient a business is. Because of this, CFOs are now committing cash flow guidance to the market in addition to revenue and profit, making predictability of cash flow an important capability for procurement and finance organizations.

Birth of the ‘Frankenterm’

Unfortunately for most suppliers, however, the typical response to this mandate to improve working capital, no matter the reason, is to extend out payment terms as far as possible. As Tom Mathis, industry adviser to private equity firm KKR and a former procurement executive known to be the “funniest CPO in the business,” joked during his presentation, “net 30 is the LP of payment terms.” When word comes down from management that procurement or finance needs to deliver increased working capital within a year, the story often goes like this:

First, organizations determine that optimizing inventory and shaking down customers on receivables are likely out of the question, so they decide to push the burden out to suppliers — gradually, but as much as feasible. This kicks off a vicious cycle: Payment terms go up, working capital gets a slight boost and supplier costs also rise, along with an uptick in supplier frustration. As tensions rise, acceptance rates for terms or proposed early payment discounts rise, which erases working capital improvements, leading the organization to bump out payment terms again.

The cycle often starts out as a jump from net 30 to net 45, then net 60, net 90 and finally net 120, followed by various payment stopgaps like p-cards and supplier discounts. The result can sometimes be what Mathis called the “Frankenterm” — 3%30 Net 120 on a p-card. And next up: Net 180 on cryptocurrency.

That last one was a joke, but Mathis was serious when he said that this cycle is unsustainable.

According to The Hackett Group’s 2018 U.S. Working Capital Survey, most companies tend not to sustain their improved working capital performance after pushing out payment terms. Only a third of companies surveyed that improved their cash conversion cycle (CCC) for three years managed to sustain this performance for five years. Moreover, only 7% managed to do so for seven years.

To both break this losing streak within businesses and end excessive strain on suppliers, Mathis advocated taking a new approach.

Taulia and a New Working Capital Paradigm

The way to break this vicious cycle is to treat suppliers like a business would want to be treated by its own customers, Mathis said. That means being “a good payer” by paying on time, every time; providing almost instant liquidity for a supplier’s accounts receivable; and, ideally, creating an environment where all parties have complete transparency into all invoices, payments and the status of each.

Given the setting, Mathis naturally positioned Taulia as the way to meet these goals. But he also speaks from experience: As the former chief sourcing officer of Milliken, a textile manufacturer, Mathis implemented a Taulia-backed supply chain finance program with 1,300 suppliers. What he did was insert Taulia within the DPO stretch cycle between the increase in supplier cost and supplier frustration, offering early payment instead of the then-standard p-card. The program ultimately led to higher acceptance rates for longer payment terms (net 60) along with a working capital bump, but also helped lower costs (and raise credit ratings) for suppliers, turning the cycle from vicious to virtuous.

At the event, Taulia shared some recent successes it has had with other clients:

  • AstraZenica funded $600 million in new drug innovations directly from cash liberation through its SCF program.
  • Airgas streamlined its P2P process by automating more than 600,000 invoices annually.
  • Australian telecom giant Telstra improved its DPO metrics by 29 days, releasing about $350 million from the balance sheet.
  • Taulia has created more than 5.2 million supplier connections, transacted more than $1 trillion through its platform and accelerated more than $91 billion in supplier payments.

These are not small improvements but game-changing shifts in how businesses think about cash. Taulia hopes that its ability to support next-generation SCF will be one of the keys to creating jobs, wage growth and technological innovation by returning cash from the financial supply chain to more valuable efforts.

“What we want to do is not small, tactical, incremental changes to working capital programs,” said Matthew Stammers, vice president of marketing at Taulia. “What we want to do is bring a revolution in how we think about cash flow.”