Lessons from Tesco: How To Optimise Payments

We wrote last week how Tesco “Acted Unreasonably” In Their Treatment Of Suppliers. Today, Ad Van der Poel, SVP Financing Services at Basware (a global leader in purchase-to-pay and eInvoicing solutions), shares his opinion and advice.

Last week the news emerged that ‘Tesco delayed paying its suppliers to improve its own financial position’. But by no means are they the only company doing this. In fact, research conducted by Basware and Mastercard found that 57 percent of international businesses admitted to having actively delayed paying their suppliers in the past 12 months. So why are they doing this – and what are the alternatives?

Unsurprisingly, seven in ten of the companies (69 percent) surveyed admitted to using late payments as a strategic lever to hold on to cash reserves – despite recognising the practice is detrimental on many levels. Not only does it make forward planning harder, it can cause specific financial difficulties, including payment of salaries and suppliers – not to mention the negative brand publicity and CSR implications like in the Tesco case.

We all know that working capital and cash flow can make or break a business. But there must be other ways of optimising this rather than holding back payments, right? Right!

To achieve working capital optimisation in the supply chain, businesses need to be innovative and improve collaboration between different departments or functions. They also need to be willing to invest in simplifying processes and ensure compliance to see the biggest improvements. Once they have done this, they will be able to optimise payment and collection strategies by taking advantage of spend analytics and innovative new financing options.

So, how can financial decision makers optimise working capital in the supply chain, without compromising suppliers and facing a media backlash? The four-part answer is:

  1. Harmonise processes

B2B networks have converged with P2P, which means the information and financial supply chains are more in focus. Rich information must be seamlessly exchanged between buyers and suppliers, supported by process automation and analytics. Once the P2P process is simplified, buying and selling becomes quicker and easier.

  1. Collect money earlier

It seems a simple way of making more money, but it requires the first step to have been taken. You can’t collect money earlier if you don’t have a harmonised process that ensures accuracy. Incentives may be required, but that can be factored into any decision. To achieve this, eInvoicing and AP automation speed up the process, getting invoices in front of customers more quickly. Having robust financing options available can then help facilitate quicker payments.

  1. Pay less

Another seemingly obvious statement, but more difficult to achieve. Everyone would like to pay less, but finding the conditions that are right in order for your supplier to accept less, requires a tight grasp of all of the moving parts of the supply chain. Spend analytics and the ability to negotiate discounts on a sliding scale make this process easier than ever before.

  1. Pay later

Sometimes, you just need to delay the point at which cash leaves your business … but your suppliers won’t be around for very long if you just don’t pay them. That means finding the right forms of interim financing that keep all parties happy. Faster payment services are crucial here, paying later and paying late are two different things. Paying later is good, paying late is not!

The reason that the CFO must take on this task is that there is a balance that must be found across finance, procurement, AP and Treasury. Only the CFO will have that broad overview and insight.

Once the new P2P process is in place and operating effectively, companies have been able to achieve as much as 90 percent spend under management and improve payment cycle time by 13 days. More importantly, the finance team is now positioned to optimise payment strategies and working capital with analytics and flexible financing options. No more negative press – and many happy suppliers!!


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Voices (2)

  1. David Atkinson:

    A good, and helpful article.

    In addition to Paul’s comment above, I’d add a sixth important factor, one obviously ignored by Tesco (and undoubtedly many others). That is INTENTION. A intention to treat suppliers with respect; and intention to recognise that managing relationships using spreadsheets and data is a pretty hopeless way to optimise supplier motivation and commitment; and an intention to protect the company’s reputation at a time when large corporates are sitting on cash mountains, under-investing in capital (and opex too), and when interest rates are so low the time value of money is much less of a factor than it was pre-2008.

    Sadly, most procurement leaders are left looking impotent and short of influence, when instructions are passed down from the CFO’s office, from number-crunchers who have never bought or sold anything professionally in their whole careers.

  2. Paul Wright:

    I think you have identified a fifth part, which would be on my list – joined up management with CFO oversight. I’ve not been on the board of a major multinational but Imsuspect that silo thinking has an imact.. The late payment has a positive effect on cashflow controlled by Finance – the consequent late delivery by a supplier is a problem for Operations and Procurement., and the image of the compaany. The costs and benefits need to be weighed together.

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