Today’s business environment is more unpredictable than ever before. New competitors appear overnight from unexpected quarters, technology is driving disruptive innovation and companies struggle to survive. The life expectancy of a Fortune 500 company is now only 15 years (Forbes).
Companies recognise that cash is critical to fund innovation and growth, enabling them to compete in this new world order. However, the mechanisms for cash management have historically been fragmented with The Hackett Group estimating that some $6tr is locked up in supply chains across North America and Europe alone.
We brought together two of the industry’s Gamechangers, Nick Boaro, Working Capital Partner at EY and Cedric Bru, CEO at Taulia to shine a light on how companies now have the opportunity to rethink how they can optimise cash positions across their own businesses, and that of their suppliers to underpin strategies to drive their competitive positions.
With many definitions given to working capital, it’s important first to get an understanding of what it actually is. Nick describes working capital quite simply as “the cash required to run your businesses”. He goes further to say that companies are focused less solely on P&L as a key metric, and more increasingly on the Balance Sheet in an understanding that in the modern world, the strength of a company’s cash position is critical in enabling it to compete effectively.
It’s a mantra that is overused and abused, but companies without a clear set of goals will not be successful in executing a working capital strategy.
Cedric Bru offered some insights on what companies can think about in developing their goals: “Not all business are created equal” According to Cedric. “Businesses differ not only in stages of maturity, but also in stages of business cycles.” When it comes to setting goals, Cedric categorized businesses as follows:
1. Businesses with a need to derive cash: An obvious strategy would be to extend payment terms and at the same time use Supply Chain Finance to ensure that suppliers are still paid in a timely fashion.
2. Businesses with a need for return on excess cash: In instances such as this, Dynamic Discounting (DD) is deployed, where the business uses its own cash to pay the suppliers early, while capturing a discount on early payment, thus increasing margins and reducing CoGS.
3. Businesses with an imperative to free up cash and drive yield: Certain businesses perceive the benefit from not only freeing up cash in the supply chain, but also from deploying part of the working capital released to invest in early payments, generating early payment discounts. In these situations, a hybrid solution of SCF and DD is developed based on company goals on cash positions, yield, DPO, DSO and other relevant KPIs.
Every company is both a buyer and a supplier, and businesses are increasingly realizing that the success of their suppliers is directly linked to their own success. The working capital strategies that are now being developed encompass improving the working capital positions of both the buyer and the suppliers in the supply chain. Cedric highlighted that large buying companies are now able to leverage their lower cost of capital and make it available to their suppliers, thus reducing the overall cost of financing in the supply chain and improving suppliers financial health.
According to Cedric, while historically companies have invested billions of dollars in systems to improve physical supply chains, financial supply chains, the way companies pay and get paid, have often remained somewhat archaic with paper invoices, process inefficiencies and limited financing mechanisms.
Whether a company’s goal is catered towards unlocking working capital or increasing returns for excess cash flow or both, technology can play a significant role in a number of critical ways:
A. Today we can interrogate the data from millions of suppliers exchanging billions of dollars in invoices, together with third party data to understand what payment terms and rates suppliers are actually accepting and what they are likely to accept in the future. According to Cedric and Nick we can use this information to ‘size the prize’ ie to understand what the real potential is for a working capital or yield program
B. Technology can also be used in a way that enables us to finally reach out to and offer earlier payment to all the suppliers in a supply chain through a single platform
C. And finally, technology can be used to understand program performance and to adjust these programs immediately in response to changing commercial and financial goals. Artificial Intelligence now informs and enhances our decision making and can now be used to convert program objectives into automated and self adjusting actions on the ground.
So, how do you get started? The gamechangers, Cedric and Nick had a few recommendations that would help you and your organization ensure full alignment across cross functional verticals and long term sustainability when it comes to working capital optimization.
Cedric’s closing words struck a strong chord “Ultimately, if you take the right approach, you will be surprised at how quickly you can gain buy-in and support within your organization for any Working Capital initiative. Set your goals right, do the right math, then focus on good execution, iterate, and in the end, it will be your key stakeholders who will be pleasantly surprised with the results.”
The close of the Fireside chat saw a unique offer from Nick and Cedric, an offer to provide a free benchmarking exercise to help companies understand the ‘size of the prize’.
Click below to watch the full replay!
Taulia enables companies across the supply chain to free up cash by having more choice in when to pay and get paid. Over 140 Fortune500 companies including Home Depot, Pfizer, Hallmark and Vodafone, together with 1.5 million suppliers partner with Taulia to improve the strength of their supply chains.