I recently wrote an article for eSourcing Forum about the role procurement can play in carrying out a company’s working capital strategy. Since more procurement pros are reporting to Finance, I shared three ways procurement can support the CFO:
- Establish Payment Terms
- Implement Technology to Manage Initiatives
- Manage Interface With Suppliers
The third way, which leverages procurement’s existing relationships with suppliers, allows procurement to contribute to working capital by managing the importance of expense-based supply relationships to an operation. As companies increasingly depend upon their suppliers to meet customer demand, monitoring the supply chain for disruptions and rising risk levels becomes an activity of utmost importance – one that procurement is uniquely qualified to fill.
Consider these three questions when leveraging relationships with suppliers to help increase cash flow:
1-How can procurement and suppliers work together and collaborate to improve their mutual liquidity?
2-What is the collaborative potential of supply chain finance?
3-How can companies work with their suppliers to keep the cash flowing to the benefit of all parties?
In the past, the determination of payment terms was a zero sum game. For example, every additional day you have to pay your suppliers is another day they are waiting for their money. For every day sooner you must pay your suppliers, you lose a day to do something else with that money.
Although cash on hand continues to be important to corporate financial and operational health, it is relatively inexpensive to borrow. When you look at the terms available through lending entities, it may actually make sense for procurement to agree to earlier payment terms, borrow the money, and split the finance charges with a supplier.
For both buying and supplying organizations, supply chain finance is a question of opportunity cost. What opportunities will be lost if capital is tied up in the supply chain? The value of cash to a publicly traded company will have an impact on their stock price, while to a private company the availability of cash may determine its ability to survive and grow. Small businesses are perhaps most notably strapped for cash, something even the federal government has worked to address through their SupplierPay and QuickPay initiatives.
Regardless of what each organization intends to do with the excess capital, the opportunity cost must be weighed against finance costs to determine if forming a working relationship is the answer.
Are you aware of your organization’s borrowing costs?
What would your company do if there was extra cash available?
How would extra revenue change the organization’s perception of procurement if you can make that opportunity a reality?
Share your thoughts by commenting below or tweeting @BuyersMeetPoint.