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Total Number of Subscribers: 1626 |
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Date:24th June 2010 |
Compiled by: M Sathya Kumar |
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The
global financial crisis has forced companies to focus on working capital to
an unprecedented degree. How can treasury departments collaborate with
sourcing and procurement teams to achieve this? Companies
are emerging dizzied from the economic rollercoaster of the past few years.
Despite encouraging signs of recovery, there’s a lingering uncertainty about
its underlying strength, and caution about long-term demand. Corporate
leaders are preparing for whatever lies ahead. If
there’s such a thing as nervous optimism, we are living through it. It is
causing finance and treasury leaders to train a sharp eye on cash flows as
they seek to master the near-term imperatives of viability and
maneuverability. Working capital management is ‘in’- the exercise of watching
accounts receivable (A/R) like a hawk, aggressively managing accounts payable
(A/P), and streamlining inventory have risen increasingly to the top of the
corporate agenda. Cash is king again. And
long live the king! An extraordinary balance sheet-strengthening exercise has
been under way in the past few years. In the Scrutiny
is fixing on money flows in the supply chain and driving demand for a new
breed of solutions and providers. Payment discount solutions wrapped around
an electronic invoicing (e-invoicing) initiative, supply chain finance, and
even traditional solutions such as purchasing cards (p-cards), and factoring
are being overhauled. Most solutions are focusing on mitigating the impact of
payment term extensions - driven working capital initiatives on the one hand
and accelerating A/P collection on the other. Key Elements
At
the best of times, moving payment terms around is a challenging negotiation
given the perception of a win-loss outcome. So what are the necessary
elements of a properly equipped working capital strategy? 1. Procure-to-pay (P2P) and
order-to-cash (O2C)
These
technology-based offerings streamline and automate these cycles, reduce
legacy and burdensome paper-based systems, increase visibility, and improve
efficiency. They are a must-have in the working capital workout equipment
list. Properly deployed and configured, the net result is clear: buyers pay
smarter, their suppliers see approved invoices faster, resolve disputes
better, and enjoy far greater certainty of payment. That’s a fundamental
ingredient to a broader working capital effort. 2. Established trading partner
networks
Companies
are turning to supplier networks to fuel greater collaboration and rapid time
to value in their e-initiatives focused on cash flow and payments. No longer
in their infancy, supplier networks can deliver far-better value and remove
the burden of in-house ‘do it yourself’ deployments. They have the virtue of
reducing multiple supplier efforts as well: suppliers can go to one place to
reach multiple customers. 3. Working capital management
Armed
with a platform that turns invoices into A/P and A/R, trading partners are
able to take advantage of new opportunities to remove inefficiency, or create
new value in payment flows themselves. Direct
A/R financing can enable suppliers to independently and directly finance
their receivables through a panel of independent third-party funders who bid
for the receivables offered - permitting a lower finance cost than
traditional factoring. Finally, traditional payment solutions such as p-cards
round help by offering payment control for buyers, and payment to suppliers
at the point-of-sale (POS). Together, these solutions allow companies to
optimise cash flow and operations and mitigate supply chain risk. Optimising
working capital within the supply chain involves a close focus on money flows
and supplier relationships. In this new mindset, the treasury function merges
with the procurement/sourcing role to create new practices and approaches.
Success in working capital management initiatives recognises that value
calculated on Excel worksheets can only be realised with the help of
excellent supplier relationship practices: treasury and procurement need to
work together to get it right. Experienced supply chain providers can help
them achieve this. Building the Structure
The
best working capital structure can be built in the following ways: 1. Build a foundation
Don’t
even think about a working capital strategy unless you have the foundation
built or at least planned. Central to any working capital solution deployed
on the back of the approved invoice is, well, the ability to approve the invoice
quickly. If you can’t do that, you will be setting yourself up for woeful
results. In addition, avoid shortcuts. 2. A spend analysis is key
A
thorough analysis of your spend file from the perspective of working capital
is essential. It will show you what the opportunity is with what suppliers,
and is based on assumptions you set.This first stage is just mathematics.
Beyond analysis, it’s critical that Excel macros are reality-tested with the
knowledge that comes from history and relationship. This is where the
procurement/sourcing role is key, for only they are best positioned to know
what finally should be targeted for any buyer/supplier trading relationship.
More than this, it will likely be the procurement/sourcing team which will be
tasked with making sure the target set is actually achieved. There
is no ‘one-size fits all’ for working capital management. Look for a solution
that will reflect the various shapes and sizes of your suppliers - as well as
your own internal needs. 3. Involve the chief financial
officer (CFO)
The
CFO is aware of working capital value propositions that impact earnings per
share (EPS), days payables outstanding (DPO), working capital, net interest
expense, cash conversion cycles (CCC) and expenditure reduction through the conversion
of early payment discounts and rebates. These financial ratios and
performance metrics are vital in the new economic environment. Your
CFO will not only be a valuable ally, but potentially a co-sponsor of a
significant working capital initiative for your company. The right level of
attention ensures that resources are secured, IT resources are identified,
and the organisation is aligned on achieving the benefit identified. More
than that, it helps focus the mind of the supplier, too. 4, Don't underestimate the
importance of supplier engagement
Don’t
underestimate supplier enablement. Many brilliant supply chain initiatives
have foundered on the shoals of execution. Working capital management,
despite its allure, is no exception. Make sure your provider doesn’t adopt a
‘if you build it they will come’ mentality, or worse, ‘we will build it so
you can get them to come’. Look for the partner to prove real-life experience
in helping you get your suppliers engaged and enabled. You can’t look for them
to negotiate commercial terms on your behalf, but short of that, there’s
quite a bit they can help with here. Once your programme is up and running,
be flexible enough to fine-tune outreach efforts - there will always be
something to improve. 5. Consider the process holistically
A
successful working capital management programme is more than just technology,
a few Excel macros, and financing. It’s about working with you from the start
to understand your objectives, design a programme that meets your needs,
support your team internally, and stay with you throughout your programme to
ensure that you and your supply chain achieve new levels of financial
efficiency. Conclusion
Businesses
and their supply chains must be streamlined and made agile enough to ride out
today’s still-turbulent global economy - and succeed. In an era where cash is
king, dollars spent to protect and enhance the commercial payments ‘monarchy’
will not only be seen as prudent - but required. By investing now, companies
can effectively manage the challenges inherent in the ‘new normal’ and
position their organisations to compete strongly when economic conditions
truly improve. Article by Peter Lugli is senior director of working capital management and business development in the Ariba Network Business Unit. He is responsible for the company's strategy and direction regarding Ariba's working capital solutions and services offered to buyers and suppliers |
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