Motherhood, Apple Pie, and Paying Suppliers Early

Can’t argue with any of those three, or can you?

We all know the story by now. Large companies are holding lots of cash and at the same time, the percentage of small business struggling is on the rise as business is under pressure due to inadequate cash flows.

So lets’ make large corporates the bank through early pay programs right? Okay, love it, and on top of it, lets make AP a profit center (see Should Account Payable be a profit center?) and Treasury looks great because they can get fantastic yields relative to those paltry rates paid on bank deposits or Commercial Paper.

Everyone is happy and yes, this is as good as a parking lot barbecue before a beautiful Saturday afternoon of football.

Yet something is not quite right with this picture. Do we want our large corporations to be banks to their suppliers? Let’s ask a Wall Street analyst and see what he or she thinks. When these programs become more material, I surmise the first question asked is why aren’t you investing that cash in the business? That is the question the CFO will have to answer. Is this a good thing? I hope they have a good response.

I suspect the analyst, like me, would want companies selling more (whatever they sell,, chemicals, diagnostic equipment, valves, etc.). I want them investing in those businesses (R&D, new sales channels, automation, etc.) because they are growing, have great margins, and need cash.

But the world has too much debt. And when you have too much debt, you don’t grow as fast. Therefore, companies aren’t investing that cash as much in their business. They are doing it back in their supply chains.

This is why we need third parties to finance these early pay programs. Then we really do have win-win-win. Companies DPO is not impacted and they can use their cash in other ways, their suppliers get early pay, and investors find an attractive yielding asset.

So let’s go enjoy that barbecue.

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First Voice

  1. Robert Kramer:

    Great post highlighting an important paradox with Dynamic Discounting.

    To make investors and Wall Street happy, and avoid negatively impacting Economic Value Added (EVA) and Return on Invested Capital (ROIC), the buyer must charge the supplier a very high rate (eg 10%+ APR). That’s the B2B equivalent of pay day loans. If the buyer charges a lower rate, say 6%, then they are investing capital at a rate which doesn’t cover their cost of capital and negatively impacts EVA and ROIC. 6% is still pretty high, even B rated companies can finance receivables at much lower rates than that.

    Bob Kramer
    VP, Working Capital Solutions
    PrimeRevenue, Inc.

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