Synergy: The combined effect of individuals in collaboration that exceeds the sum of their individual effects.- Stephen R. Covey
CFO Magazine and REL came out with their annual Working Capital Survey today and as usual there were some interesting observations when it came to supplier collaboration. Chief among them was that 2009 was the worst year ever for corporate working capital performance since CFO began tracking working capital trends more than a decade ago. Among the three levers of operating working capital (receivables, inventory, payables), only payables saw an improvement with DPO (Days Payable Outstanding) up 11.4%.
Unsurprisingly this was nearly offset by an increase in receivables as DSO (Days Sales Outstanding) deteriorated by 10.4%. It’s no surprise that extending supplier payment terms had the biggest positive working capital impact in 2009. According to the Credit Research Foundation, 94% of firms reported that their customers were leaning on them for extended payment terms. The challenge with increasing supplier payment terms however is the corresponding negative impact it has on suppliers’ working capital and costs. As can be seen in the REL figures, the gain in payables was offset by an almost equal gain in receivables, leaving total working capital nearly unchanged based on these two intertwined metrics. Further, when extending payment terms, buyers need to ensure that these actions don’t destabilize the supply chain and that costs aren’t simply shifted from buyer to supplier.
If only there was a way to increase supplier payment terms while at the same time speeding supplier payments in a way that didn’t simply shift costs to suppliers, in a way that reduced costs, capital and risk throughout the supply chain? Well, of course there is a tool which can help accomplish these objectives and support a “sustainable working capital program” – Supply Chain Finance.
With SCF, suppliers can effectively choose when they want to get paid through an “early payment” option which provides low cost financing on demand over the Web, thus eliminating the negative cash flow impact of a terms extension. Costs are reduced and cash flow improved throughout the supply chain rather than simply shifting the entire burden from buyer to supplier. Through this type of buyer/supplier collaboration working capital improvements can be sustained, whether the working capital lever in question its DSO, DIO or DPO.
Published June 1, 2010