Working Capital: Leverage Spend to Improve Capital EfficiencyThought Leadership
This is a guest blog from our partner Nitor Partners, written by Jim Wilson, Functional Lead.
Your organization’s total spend is a powerful tool to wield. Leveraging purchasing power to capture volume- based pricing within a competitive supply chain builds sticky relationships with healthy suppliers, keeps input costs low, and acts as a hedge against inflation. If we apply the adage of, “Whomsoever holds the gold makes the rules”, we can further leverage this purchasing power to unlock working capital, improve capital efficiency, and generate savings.
This is a great place to begin the conversation about supplier trade credits and terms. The goal of trade credit is for the supplier to provide a 0% interest loan for the goods or services rendered allowing the buyer time to convert these inputs into a sale. Under the standard trade terms of Net 30, the buyer is given 30 days to pay the supplier after receiving the invoice for goods or services rendered. The reality is, to turn inventory, make the sale, and then collect funds takes most buyers over 30 days.
This leaves their working capital stretched and exposed. Understanding this dynamic has compelled some buyers to extract longer payment terms in exchange for higher purchase volume. Again, buyers are recognizing the value of their annual spend (gold) and leveraging it (making the rules) to push payment terms out to 60, 90, or even 120 days for some categories.
So, what happens when a buyer gets another 30 or 60 days to pay their suppliers? It frees up cash and gives the buyer the option to redeploy that cash into other value- accretive endeavors such as organic/inorganic growth opportunities, paying down debt, or even capturing early payment discounts from the supply chain. Is it worth it? Absolutely!
Consider the discount trade terms of 2/10 Net 30. By paying a supplier in 10 days versus 30, you can successfully deploy your unlocked working capital, capture a supplier discount that incrementally lowers your cost of revenue by 2%, and generate a yield of over 36% APR! In the current environment, it is fair to say that there are not too many guaranteed investments your Treasury Department can capture that are yielding this return. From the supplier’s perspective, the offering of discount terms is an excellent way to manage cash flows, navigate cash, seasonal needs, and avoid short-term borrowing or bank constraints. Proper execution is a win-win for all parties involved.
Now that you have freed up working capital and identified suppliers that either offer early payment discounts or may have the need to be paid early, what is the most efficient way to execute? That is easy! Ivalua offers a fully integrated Dynamic Discounting module to efficiently identify or present suppliers the option to be paid early. In addition, requests for early payment can be made through the supplier portal by the supplier allowing them to pick a settlement date while recognizing the cost of the discount beforehand. This tool helps the buyer efficiently deploy excess cash while allowing the supplier to match current cash needs with the opportunity to be paid early. Again, a win-win for all parties involved.
In summary, let us not forget that cash is king! Cash is a powerful tool to wield in exacting volume discounts, extending terms, capturing terms discounts, and creating sticky and healthy relationships with your suppliers. With tools such as Ivalua’s Early Payment Module, you do not have to let working capital sit on the balance sheet, you can put it to work!
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By Jim Wilson, Functional Lead, Nitor Partners, www.nitorpartners.com