No matter the company–or what side of the buyer/seller dynamic it falls on–liquidity is vitally important. Without working capital, there are no day-to-day operations, employees don’t get paid, facilities aren’t maintained, and there is no more business.

While the need to maximize working capital is universal, the fundamental path to doing so is not. Buyers want to hang on to their cash as long as possible. In fact, it was not uncommon in 2020 for large companies to have average days payable outstanding (DPO) move past 100. And sellers, of course, want their money as soon as they can get it.

Obviously, this can cause conflict in these business-critical relationships. But there are win/win scenarios and the race to secure capital doesn’t have to create an environment that pits buyer versus seller.

Starting with Italian automaker Fiat in the 1970s, companies have implemented early-payment programs that use third-party sources of capital or discounting to find a balance that allows buyers to keep their cash longer (or at least some of it with discounting) and allows sellers to get paid before the agreed terms. In the 40-plus years since, the options for early-payment programs have grown exponentially and include:

  • Supply Chain Finance
  • Dynamic Discounting
  • Marketplace Auction
  • Dynamic Credit Limits and Invoice Finance
  • Purchasing Cards (P-Cards) and Virtual Cards (V-Cards)

Each of these programs has found a place in the supply chain ecosystem, however, they can be expensive and cumbersome. While quality programs exist with reasonable cost of capital, they are only available to the largest sellers and do not address the liquidity needs of the majority of a company’s suppliers. This leaves the long tail of the supply chain (roughly 80 percent of sellers) at risk.

This has always been a tough problem to solve for a variety of reasons, including credit ratings and less-than-optimal bankability. Tightening credit markets and the COVID-19 pandemic have further inhibited the ability of smaller to medium business suppliers to access the funding needed to maintain their production, much less grow.

To help companies better understand the challenges and choices for providing early-payment options for all suppliers, we commissioned Spend Matters to complete a five-part analysis: Payable Strategies for the Long Tail Suppliers. The series will walk you through a comprehensive process to help you guide you through understanding your current payables landscape to making a final decision on a new accounts payable (AP) strategy for your business.

Download Payables Strategies for Long Tail Suppliers

The five steps and important questions to consider include:

Assessing Your Current Situation

  • What are your legacy technology systems?
  • Spend categories and purchasing process?
  • Legacy payment terms?
  • Addressable spend?
  • Who should be at the table when discussing your current AP situation?

Understanding Addressable Spend and Early-Pay Options

  • What portion of your AP is actually eligible for early-payment programs?
  • What are the options available to my company for early payment?

Addressing Operational Challenges Early

  • What is the current AP/shared service center culture?
  • What are the transaction flows?
  • What credit note adjustments are needed?
  • How difficult is the KYC process?
  • How will reconciliation work?
  • What IT resources will be required?

Selection Process and Key Issues to Address

  • What are the pros and cons of each early-payment option?
  • What fees are associated with each option?
  • Are there any special considerations like multi-national jurisdictions?
  • Is there a technology platform already in place for your suppliers?

Getting to a Decision

  • What are your core RFP requirements?
  • Of these requirements, which are the most important?
  • How do you approach supplier adoption one a decision is made?

There is no one-size-fits-all approach to supplier early payment. Your business is unique. But whether it’s extension of DPO, rebate and discount income, supplier financial health, or the management of diversity and ESG goals, there is probably an option that fits your company’s needs. We hope this series helps you better understand those options, your current position, and can guide you in making a decision for a new strategy–if, in fact, one is appropriate.

For more than 25 years, LSQ has been helping companies meet their working needs. To learn more about how we can help your business do the same, visit lsq.com/platform/accounts-payable/supply-chain-finance/. If you are ready to have a conversation, visit lsq.com/contact/.

Photo by Lukas from Pexels.

Author:
Andy Cagle
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