Leveraging Strategic Supplier Spend Solutions
by Merisa Lee Gimpel, Payments & Receivables Market Manager EMEA and Sameer Sehgal, Head of Trade EMEA, Treasury & Trade Solutions, Citi
Treasurers have been at the forefront of corporations’ efforts to centralise, automate and optimise their financial activities in recent years. As companies have extended into new territories, treasurers have become increasingly adept at using centralised structures, such as regional or global shared service centres (SSCs), payment factories, treasury centres and in-house banks to maximise process efficiency, reduce costs and achieve visibility over cash flows through best practice cash management. In addition, however, treasurers are also leveraging these centralised structures to create working capital benefits, generate new income streams, increase the resilience of their supply chain and minimise counterparty risk on an unprecedented scale.
A payments toolkit
Liquidity and risk management have become the watchwords of the global treasury community. Although external financing may not be a priority for cash-rich, or large highly-rated companies that have easier access to capital than their smaller, lower-rated peers, optimising working capital is a priority for all companies. Put simply, this involves managing functions that impact payables and receivables so that there is sufficient cash available to fund obligations as they fall due. There are a variety of levers that treasurers and finance managers can use to influence working capital, reduce costs and minimise supply chain risk, not least the way in which they pay suppliers. These range from more efficient processing of traditional electronic payments, to innovative structures such as supplier financing, dynamic discounting and purchase and virtual card settlement.
Most large multinationals have a diverse supplier base, in terms both of the size, location, the type of goods or services offered and criticality of suppliers, and also the payment terms, value of spend, frequency of payments. Each supplier will also have a different need for and access to short-term liquidity. To identify the right strategic spend solution, companies need to establish a detailed understanding of their suppliers, which then informs proper segmentation and spend analysis.
Enhancing working capital
Each technique brings different benefits and affects working capital and returns in different ways. For example, use of payments instruction warehousing, which ensures settlements are made on invoice due date and not earlier, preserves cash and therefore maximises returns or minimises financing required. For a company spending $5bn annually, every day’s improvement to days payable outstanding (DPO) represents a $13.5m working capital saving. By adding better controls to payments processes, a company can also avoid late payment charges and take advantage of early payment discounts where appropriate.
Some of these techniques, particularly supplier financing, bring benefits to both the buyer and its supplier (see figure 1). For example, by enabling suppliers to access the invoice amount before its due date, typically at a competitive financing rate, suppliers’ liquidity positions are enhanced. This in turn increases the resilience of the supply chain and may enable the buyer to achieve better commercial terms without negatively impacting suppliers. The working capital benefits to the buyer can be substantial: a $500m annual spend supplier finance programme combined with a days payable outstanding (DPO) increase of 30 days represents $41m of free cash flow.