Show Me The Money: Driving World Class Cash Management


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Operational efficiency isn’t the only obsession with accounts payable today. As top performers streamline invoice processing, the next step is to help their finance organizations manage cash better by combining early payment discounts with a payment term extension program.

In this session, you will learn how you can mine profits in accounts payable from early payment discounts while supporting treasury’s goal to improve working capital. The ability to maintain or extend days payable outstanding (DPO) and expand the discount pool is one of the great, untapped opportunities in all of corporate finance.

Key takeaways:

- Compressing the invoice processing cycle has a dramatic impact on how organizations manage their cash
- Dynamic discounting presents new ways to capture discounts, through real-time collaboration and sliding rate scales up to the net invoice term
- Payment terms rationalization and extension in conjunction with an early payment discount program deliver cost savings and increased returns on cash while also allowing you to maintain or extend your DPO

Presentation delivered at ProformaTECH 2014 -
Track: Operational Advantage | Session: 2

Speaker: David Bennett, Senior Manager, Working Capital Consulting, Ariba

Published in: Business
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Show Me The Money: Driving World Class Cash Management

  1. 1. Show Me The Money: Driving World-Class Cash Management David Bennett Director, Financial Solutions Ariba, an SAP company
  2. 2. Working Capital Management Overview • Business Context For Working Capital Management & Early Payment Discounting • Working Capital Tools • New Potential from Dynamic Discounting • Developing an Effective Working Capital Program 2 © 2014 Proformative
  3. 3. Cash Conversion Cycle = Operational Efficiency Why DIO, DSO and DPO Matter DIO (Days Inventory Outstanding) DSO (Days Sales Outstanding) DPO (Days Payables Outstanding) CCC (Cash Conversion Cycle) $ Inventory $ Reduce $ Receivables $ Reduce $ Payables $ Increase $ Working Capital $ Reduce Goal: Reduce Working CapitalFree up Cash Goal: Maximize Returnon Cash 3 © 2014 Proformative
  4. 4. Working Capital Tension Situation - Objectives of Buyers and Suppliers Suppliers Buyers Payment Terms Stretched Historic Cash Reserves: $1.9T+* Low Interest Rates: 0% - 0.3% Investor pressures for greater returns Supply Chain Risk 4 © 2014 Proformative Working Capital Tension Limited bank credit Low visibility into cash flows Cash flow is critical
  5. 5. Working Capital Tools for DPO/DSO • Multiple options are available – Diversify • You can employ ALL options – Not mutually exclusive • Combining discount savings + DPO improvement – Technology & Managed Services 5 © 2014 Proformative
  6. 6. Automation and Dynamic Discounting 3% 10 20 Monetize Idle Payables Days © 2014 Proformative Approvals Paper Approvals e-Invoice Discount Rate 1% Invoice Reduce Cycle Time 2% 6 • Compress cycle time, maximize discount window Avg eInvoice cycle time is 4-6 days • Monetize idle payables 88% of invoices sit idle until due date¹ • Put payables cash to greater returns Early payment discounting returns 24% Avg APR • Optimize terms to balance DPO Rationalize terms & industry benchmark ¹Source: PayStream Advisors 30 60
  7. 7. Maximize Discount Capture: Flexible, Pro-Rated, Self-Service Buyer Offers Early Payment? Yes “Your invoice is approved. Supplier Needs Cash? No Wait for payment at maturity date. Yes “I want to get paid early every time!” Yes Yes It will be paid at this date in the future.” Yes Yes No 7 Yes Yes © 2014 Proformative Supplier Response Dynamic Discount Type 25% “I want to pick the invoice(s) I want paid early, and choose when to be paid.” “I want to be paid early, but I want to make a counter-offer to the rate my Buyer has offered!” “I want to offer up an early payment discount.” - 20% Automatic Opportunity 15% Ad hoc 10% Visibility Recent studies show 50% of pre-negotiated discounts are never captured¹ ¹Source: Aberdeen 5% Ad hoc (Supplierinitiated) Capability
  8. 8. Developing an Effective Working Capital Program 8
  9. 9. Three Pillars to Discount and WCM Success Technology + • Dynamic discounting Daily Discount Rate Scheduling & Calculation to complement ERP/FI • Cash Optimizer Identify opportunities for cash acceleration with customers • Program Configurator Define discount rate groups, amount of cash to use, and which suppliers to include 9 © 2014 Proformative Experience / Insight • Size of B2B network Leverage scale and insight to offer/set proper payment terms with suppliers • Market Knowledge Insight to incentives, category intricacies and financial capabilities to target and maximize returns • Balanced Approach Customize program to cash return and DPO requirements + Capabilities • Proven Methodology Target, onboard, and support suppliers throughout the lifetime of the contract • Rapid Ramp Reduce risk and earn early stage discounts during deployment phase • Performance Measurement Establish benchmarks, goals and measure targets against your stated objectives • Ongoing Account Mgmt Full Services & Maturity Mgmt for life of contract
  10. 10. WCM Program Methodology Accelerate Your ROI – OneOK enrolled $2M in discounts prior to technical implementation utilizing RapidRamp 10 © 2014 Proformative •Approach from a holistic working capital perspective that drives discounts, improves DPO and balance sheet. Monetize all spend across platforms Understand client’s working capital goals (discounts only or improve working capital?) • Peer Benchmarking • Supplier liquidity analysis • Analyze spend and provide recommendation Pay terms rationalization, industry statistics, network intelligence • Design a program that offers varied rates to incent supplier participation across all spend sizes and categories • Position a balanced message to suppliers Constancy of payment Standardization of pay terms More flexibility for suppliers to manage their own short term cash needs • Incorporate extensive marketing to supplier base Personnel changes – always ensure we have the right audience Seasonal changes – quarter end/year end cash driver Future liquidity changes • Program requires lifetime management Institutionalize early payment terms and grow organically
  11. 11. Average Client Discount Performance 11 © 2014 Proformative
  12. 12. Suppliers Benefit From Early Payment Program “When we submit paper invoices, it can take a long time to get our invoices approved. With Ariba, we get paid as quickly as four days, and the visibility into payment status is like gold.” Joy Stoelting, Studio Manager, Big-Giant “By submitting invoices over the Ariba Network, we have improved our cash forecasting and seen a dramatic increase in prompt payments. The substantial DSO improvement is a huge advantage in this difficult economy. ” Trish Jackson, AR Mgr, Photo Craft 12 © 2014 Proformative • ATM for Receivables • Automatic & Ad Hoc Early Payment - Early payment on demand - Opt in/out at any time • Reduces DSO • Non-Debt Cash Flow • Control over timing and amount
  13. 13. Are You Ready? 1. Does your company have strong cash balances? 2. Are less than 10% of your suppliers/spend currently discounting? 3. Do you have inconsistent terms or terms >45 days? 4. Can you process some/all invoices quickly? 5. Do you have other Working Capital initiatives in place (Card, Factoring, SCF)? 13 © 2014 Proformative
  14. 14. & 14 © 2014 Proformative
  15. 15. Thank You For Attending Show Me The Money: Driving World-Class Cash Management