C2FO. All rights reserved 1

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1 C2FO. All rights reserved 1

2 Managing a company s financial infrastructure is one of the most challenging aspects of a treasurer s role, and it has become increasingly difficult in the years since the most recent financial crisis. Larger corporations are tending to hold onto more cash reserves. However, market rates are no longer at levels that produce acceptable returns, particularly when fees are taken into account. This cash excess is a risk, and it is important to maximize short-term returns in today s market without increasing that risk. Meanwhile, small and medium-sized businesses (SMBs) are struggling to get affordable access to the liquidity they need for day to day operations and growth. This mismatch between large corporations with stockpiled cash on their balance sheets and SMBs unable to access affordable working capital can be a drain on the entire economy. There is an opportunity for leading financial professionals to take advantage of a solution that is right in your supply chain. The future of managing cash promises to look very different from what today s treasurers consider business as usual. Today, there are an abundance of fintech innovations designed to complement and support current financial tools. Leveraging your supply chain as a working capital strategy Today it s considered best practice for companies to have programs in place designed to strategically leverage the supply chain for cash management and gross margin improvement purposes. These programs often take the form of extended payment terms paired with fixed cash discounts for early payment. There is a considerable amount of work required to standardize programs and develop processes for the larger organization to support. Here are some recommendations to consider when developing a supply chain working capital strategy: Standardize terms and discounting: If terms and discounts are applied separately over time and vary widely among the eligible suppliers, it can be a challenge to manage them. Provide working capital optionality: Programs should not be limited to the largest suppliers. Consider options that include SMBs that need early payment the most. Examine cost of goods tradeoffs: Fixed early payment discounts have a tendency to incentivize suppliers to build the discounts back into the cost of goods over time, eroding improvements to the buyer s gross margin. Keep programs simple to increase adoption rates: Complicated legal agreements for the buyer and supplier can increase the cost of implementation and decrease adoption rates from suppliers. C2FO. All rights reserved 2

3 Many companies offer SCF (Supply Chain Finance) for larger suppliers and have Procurement Card (P-Card) programs in place for smaller suppliers with smaller transactions. This leaves out a large group of suppliers in the middle. A true dynamic discounting marketplace can fill in the substantial gap between large and small suppliers, benefitting your entire operation through improved margins and increased earnings before interest, tax, depreciation and amortization (EBITDA). It will also strengthen your supply chain by providing working capital to your suppliers when they need it at rates they find desirable. The true dynamic discounting marketplace model Many large corporations including Costco Wholesale, ToysRUs, Pfizer and Mohawk Industries, have realized significant value setting aside strategic cash to make it available as working capital to their suppliers in return for a small discount on approved invoices. A successful program needs to maximize supplier participation, both in the number of suppliers using the program, how frequently they use it, and how well it serves the needs of suppliers big and small. The ideal solution creates an environment that is fair and sustainable to both the supplier and buyer. A true dynamic discounting marketplace like C2FO provides suppliers an opportunity to submit early payment offers as needed to accelerate payment of invoices sooner than the negotiated terms would usually allow. Because the supplier chooses their desired rate for early payment and the frequency of usage, it reduces the risk of constant discounting being priced back into your cost of goods. Buyers will appreciate a true dynamic discounting marketplace as well, as they control the desired rate of return for paying suppliers early. They will see an increase in cash discounts throughout the year and not just a one-time cash flow benefit due to terms standardization. Perhaps the best thing about a true dynamic discounting program is that it offers risk-free returns because the company is investing in its own business. The corporate controls the amount of cash it makes available and the desired rate of return, and only approved invoices are eligible for the program. The benefits include cost reduction and improved gross margins and EBITDA. Buyers are also able to strengthen the supply chain by ensuring that suppliers have access to funding at rates that are better or at least competitive with alternative options (assuming they have access to funding at all). This approach will free up the supplier s working capital so they can focus on improving the trade relationship with customers. Accounts Payable Value Buyer push Buyer extends DPO Supplier pull Buyer generates profit SPEND LEVELS = SCF $50M+ = Everything in between = P-Cards less than $1M Cards Supplier Size Larger Smaller C2FO. All rights reserved 3

4 How technology is enabling the accounts payable revolution Traditional Sophisticated Early Adopters Innovators Laggards Paper Checks ACH Majority Workflow Virtual Cards EDI B2B Payments E-Invoicing E-Procurement Supply Chain Finance Dynamic Discounting OCR Technologies Pay From Receipt Source: PayStream Advisors, Inc. Accounts payable systems have evolved rapidly in recent years. The technology-averse are still dealing with paper invoices and checks, which have more in common with ancient Sumerian clay tablets than with any of the technology-enabled improvements further along the arc. A solid number of companies are now using automated AP workflow processes, virtual cards, and EDI. Certain early adopters have moved to e-invoicing, e-procurement, payment gateway API and online/ mobile payments systems for B2B and small businesses. Innovative companies looking to move their business forward have led the way in implementing more sophisticated supply chain finance programs including dynamic discounting, enabled by systems that help standardize their AP records and processes. Marketplace-based true dynamic discounting offers advantages over traditional dynamic discounting, in part because the network effect means that many companies will find that their suppliers are already participating when they join, which accelerates the benefits on both sides. With each step forward, inefficiencies fall away, and the benefits to buyers and their suppliers are maximized. C2FO. All rights reserved 4

5 Increase liquidity for buyers Lower financing cost to suppliers Leverage banks balance sheet Supply Chain Finance True Dynamic Discounting Enhance rate of return Early pay for many suppliers Reduce Cost of Goods Leverage own balance sheet Increase Cash Balance Increase Gross Margin Purchasing Card Open Account Increase liquidity for buyers Obtain participation rebate ( 1%) Leverage providers balance sheet Pay on standard terms to suppliers Maintain Cost of Goods Leverage own balance sheet Buyers have many choices in the market today to optimize their Accounts Payable process. The most common tools available include SCF and P-Cards, which increase cash flow. On the other side, you have Dynamic Discounting coupled with the painstaking task of terms standardization on the cash discount side to decrease cost of goods sold, thus improving Gross Margin. It is counterintuitive to think that a buyer can optimize both at the same time because speeding up payments to capture more cash discounts means Days Payable Outstanding takes a hit. Likewise, if terms are extended on the working capital side, then cash discount capture goes down. But, contrary to the way we are educated on these topics, a large buyer truly can enhance both simultaneously if they have all of these levers in place. Simply put, cash discounts and working capital are optimized due to the fact that not all suppliers will adopt a single program. In practice, a buyer will be fortunate if 25% of the supply base chooses to leverage one of the existing early payment solutions. If there are no other tools in place, then there is value in the AP process that is not being optimized. It is important for buyers to think holistically about their AP. Hopefully, we never see a time like we did in 2008 when buyers and suppliers alike had no idea if there was going to be cash available to keep things going. Implementing all of the working capital tools mentioned aligns buyers and suppliers on the most efficient way to transact business that makes the most sense for each individually. By Sean Van Gundy, Managing Director Working Capital Advisory at C2FO Sean provides working capital strategy guidance to C2FO customers For more information contact us at: sales.support@c2fo.com US / UK / +44 (0) HK / For more C2FO expert commentary, please visit c2fo.com. C2FO. All rights reserved 5