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Fostering the teamwork needed to optimize working capital

It’s a powerful thing when Procurement, Accounts Payable and Treasury are all working toward the same goal

One of the biggest challenges for corporations seeking to enhance their working capital is getting three critical internal groups — Procurement, Accounts Payable (A/P) and Treasury — to emerge from their silos, embrace the need to focus on a common corporate goal, and start collaborating on a well-conceived payments strategy.

It’s not the traditional way of doing things. But more and more companies are building the cross-functional teamwork necessary to optimize working capital for the corporation — and do so in a way that allows each of these internal groups to benefit.

At the heart of those efforts is an attempt to align payment terms (the traditional bailiwick of Procurement) with payment methods (A/P’s turf) in order to achieve the corporate goals around working capital that are keeping Treasury up at night.


Common Deficiencies in Payment Practices

The major deficiency in payment practices continues to be that too many companies are still making too many payments by paper check. The good news is that most companies have come to recognize the inefficiency of checks and the need to migrate to electronic payment methods. The bad news is that as they migrate to electronic payments, they are not always intentional about migrating to the payment methods that are most advantageous from a working capital perspective.

For example, a company might be working hard to move suppliers from check to ACH payments when the ideal transition, for working capital purposes, might be to get those suppliers to participate in an ePayables, supply chain finance or dynamic discounting program.

Other common deficiencies in payment programs often include:

Undesirable terms – Many companies haven’t found the right levers to pull to persuade suppliers to accept more favorable terms that will boost the buyer’s days payable outstanding (DPO).

The failure to standardize terms with suppliers – It can become overly complex to negotiate and manage a different set of payment terms for each supplier across a large supplier base.

Lack of a coherent payment strategy to optimize working capital – Multiple groups within the corporation — most notably Procurement, A/P and Treasury — work with suppliers on payments or are impacted by payments in some way. But too often they don’t work together to make decisions based on meeting the larger corporate goal of enhancing working capital.


The Traditional Silo Mentality

This last issue — the lack of a coherent, holistic payment strategy — is really the crux of all the other problems cited above. So how did it become so?

The problem has been the traditional silo mentality in A/P, Procurement and Treasury. These groups have their own goals and have at times pursued them with blinders on, not always understanding how their actions impact the other groups.

Procurement has traditionally looked to make the best deal on price with suppliers and get the best contract and service level agreement, and hasn’t always pushed to extend terms. Treasury, meanwhile, has a real interest in working capital improvement, but it also has to concern itself with whether there is cash available in the till at any point in time. This can put it at odds with A/P, which is all about making payments in the most efficient manner and pushing out those payments on a timely basis.

The failure of these groups to emerge from their silos — there are companies where the people in Procurement, A/P and Treasury haven’t even met one another — is the primary impediment to working capital improvement at many businesses. Indeed, by failing to get these groups to effectively collaborate on working capital goals, many companies squander a strategic opportunity.


Getting Everybody on the Same Page

Aligning payment terms and methods takes teamwork that traditionally hasn’t existed at many companies. So how do you create that teamwork?

Because in many companies the three units don’t fall under the same reporting structure, it can be difficult. But not impossible. At many companies we’ve worked with, it is Treasury that takes the lead in fostering the sort of cooperation and collaboration we are promoting.

Jump-starting the desired teamwork can be as simple as Treasury getting the three units to meet on a regular basis, either in person or through video calls. Initially, the goal shouldbe to understand each other’s pain points and goals. You can start by reviewing some basic questions about the company’s current approach to establishing terms and payment methods with suppliers:
Why are we doing it this way?
What’s the benefit to the company?
What’s the benefit to our suppliers?

The goal should be to make sure all three units understand each other’s goals as well as the key objectives from a corporate perspective: extending payment terms and issuing fewer checks.


A Strategy That Combines Payment Methods and Terms

Once all three units better understand each other and buy in to the need to work together to achieve the company’s working capital goals, they can start developing a payment strategy that makes sense for everyone. Ideally, this means a strategy that takes into account both payment terms and methods. A best practice for implementing such a strategy, and ensuring that all three groups achieve their goals, is developing a standard payments menu for suppliers.

The aim of the payments menu is to provide suppliers with choices — distinct combinations of payment method and terms — that will drive them toward the buyer’s preferred payment method. The menu allows suppliers to get the payment terms they want. But to receive those terms, they must accept a particular payment method.

The menu needs to be calibrated to align terms with payment methods so that, whichever combination the supplier chooses, there is value for both buyer and supplier. In this way, the approach is much more balanced, and thus more effective when deployed with larger suppliers that have greater relationship leverage.

A simple payments menu could offer suppliers five options and look something like this:

The payments menu offers options such as dynamic discounting, supply chain finance and ePayables to entice a supplier wanting to get paid sooner than a standard 60 days. The terms for all of the different payment methods in the menu should be designed to provide working capital benefits to the buyer.

For instance, the sample menu above might be devised for a buyer currently paying many suppliers by check in 30 days. Check is not the buyer’s preference, but if a supplier insists onbeing paid with a check, the buyer receives 90-day terms, and thus an extra 60 days to pay. If the supplier prefers to get paid sooner with an ePayables or supply chain finance solution, the buyer will then leverage the float provided by the bank to increase its DPO.

Moreover, a holistic payment strategy featuring a set of standard terms provides advantages for each of the buyer’s collaborating groups:

  • Procurement is able to simplify terms negotiations by presenting a straightforward menu that aligns terms options with specific payment methods. Instead of managing 100 different sets of terms with various suppliers negotiated through one-off agreements, Procurement can limit suppliers to a small number of terms alternatives.
  • Through the payments menu tool, A/P is able to promote supplier migration to electronic payments and achieve its goals around cost savings.
  • Treasury at the buyer can leverage this strategic approach to more effectively extend terms and enhance the company’s working capital. In addition, standardizing supplier payment terms makes it easier for Treasury to do cash forecasting. It’s so much easier to forecast cash if you have to take into account just a handful of payment intervals vs. 100 of them.


Refine the Strategy

A payments menu needs to be viewed as a living document, so the groups need to monitor its working capital impact and revise it as necessary to ensure it is achieving everyone’s goals.

One A/P manager who had taken the lead at her company and developed a payments menu was encouraged that the tool was driving suppliers’ migration to electronic payments.

However, she was discouraged to see that most suppliers were moving to ACH rather than the company’s preferred payment method, ePayables. The solution, of course, was to revise the menu to make card payment terms more favorable — and pay suppliers agreeing to accept card a little faster.

You want to refine the menu to offer a big enough “carrot” to entice more suppliers to accept your preferred payment option, while including “sticks” imposing enough to dissuade them from gravitating toward the other options.

Keep refining the menu alternatives until you start getting the outcomes you want with suppliers.

The Results Collaboration Can Produce

Any corporate working capital initiative needs to drive suppliers to accept preferred payment methods that extend payment terms and eliminate check payments wherever possible. But before those goals can be achieved, generally it will require engagement between three critical groups within the corporation: Procurement, A/P and Treasury.

A best practice for achieving working capital goals is getting these three groups to collaborate on a payments menu that can be presented to the company’s suppliers. Developed properly, the menu can help each of the three groups achieve most of their traditional goals as well as the overarching working capital goals of the corporation. The cooperation that is required to create the menu can provide a foundation of understanding between the groups.

Tremendous working capital results can be achieved at companies where these internal groups have emerged from their silos and gotten on the same page.

Learn more

Please contact your treasury relationship manager.