08 May 2012 Working Capital Management – going beyond DPO
Historically, Supply Chain Finance was very much supplier led. The aim was to extract value from unpaid invoices. By selling the outstanding invoices to the bank, a supplier can receive payment immediately. Of course there is a cost involved but faced with a wages bill due next week and an large order that needs fulfilling yesterday, immediate payment can be highly valuable even at what might be an equivalent annualized cost in excess of 20%. In it’s place and at the right time, it’s a powerful tool but it works best for suppliers with high values or volumes of transactions.
On the other side of the fence, the buyers’ side, the accountants have been performing a mirror image exercise. Management of DPO (days payable outstanding – how long it takes to pay suppliers) is a key performance indicator for any business. There is a direct relationship between DPO and the cash requirements of the business and extending DPO as far as possible reduces the working capital requirement and, as a consequence, the cost of that capital requirement. But the world is changing and what we understand to to be Supply Chain Finance is becoming a little blurred. In the past it has been associated with banking products like factoring, but as supplier relationship and financial management technology evolves, there is a growing set of the tools and techniques that businesses are using to optimize their financial position as they trade – all of which are falling under the banner of Supply Chain Finance.
There are now buyer led techniques that allow the accountants to go beyond the use of DPO and cash management to gain a better return. By understanding how to manage the key areas of supplier spend, organizations can dramatically influence their working capital requirements.
To understand more about the ways in which working capital is being managed using supply chain finance models download the white paper “Supply Chain Finance” here.