Daniel Saraste, Senior Vice President of Strategy and Innovation, Medius
Customers paying late and suppliers demanding to be paid early: It’s a scenario that finance encounters all too often. Unfortunately, poor bargaining power risks putting companies in a bad position. To put it simply, it’s a matter of financing -- a classic see-saw battle with income on one side and readily available cash on the other.
But what can finance teams do to ensure on-time payments from customers while simultaneously meeting the demands from suppliers who want to be paid early? The answer revolves around re-evaluating negotiating terms and improving the cash flow position.
Negotiating to a More Favorable Long-Term Position
For many, it’s a tough pill to swallow, but the focus is on revenue generation and sometimes the less favorable payment terms actually pay off in the long run. It’s important for CEOs to have the fortitude to accept losing a deal today, because that can mean ensuring a better cashflow position next year.
This applies both to Accounts Payable (AP) and Accounts Receivable (AR) with the words “supplier” and “customer” used interchangeably.
It may be too late to apply this tactic if an organization’s main concern is cash flow this month, but to avoid ending up here in the future, businesses may want to consider reevaluating its contract review process and policies (and compliance to policies) on negotiating payment terms both with suppliers and customers.
Some customers may be more concerned about the continuity of supply rather than cash and may be willing to accommodate an organization’s requests. Others will fight to maintain or even extend payment terms. In other words, don’t be discouraged if the answer is “No” from the first trading partners you approach. They may not be representative for your entire set of suppliers and customers.
AP and AR Options to Improve Cash Flow Position
There are various AR and AP strategies to help companies boost cashflow, each with their own risks.
AR option #1: Sell the invoice (i.e.Factoring) – This might cost up to 10 percent of the invoice amount. Businesses will get cash today, but at a cost. If income is less of an issue than cashflow, then this may be the best strategy. This is especially true during the current coronavirus pandemic when many customers say they are simply unable to pay on time because of disruptions in operations. It might prove worthy to process the invoice quickly and gain immediate cash.
AR option #2: Early payment discounts–However, why sell an invoice to a factoring company if the customer could perfectly pay early at a much lower cost? Some customers may already be used to payment terms such as 2% net30 that allow companies to be paid early if they give away 2% of the invoice amount. Agreeing on these terms with customers is far less costly than factoring and will also benefit the customer relationship as there is no third party in the process.
AP option #1: Pay late (strategically). – If a company has segmented its suppliers properly and understands the dynamics of its supplier relationships, it can identify a segment of suppliers who are more accepting of late payments. Of course, if a business starts receiving late payment fees, it should move this supplier out of that segment and start paying invoices on time. If the supplier is issuing paper invoices, this could be an ideal opportunity to encourage the move to digital invoicing to speed up the AP process.
AP option #2: Supply chain financing – This is historically slow to set up, but could be the solution to the problem. It’s cheaper than factoring (for the both the organization and the supplier), but a little more complicated to implement. This might be the tactic to consider focusing on a few high-volume suppliers.
Medius – Spend Simply Managed
Medius is a leading global provider of cloud-based spend management solutions, helping organizations drive their business forward by enabling best-in-class process efficiency, cost saving opportunities and greater financial control.
Its modular spend management suite includes market-leading solutions for strategic sourcing, contract management, procurement, AP automation and supplier management as well as data insights tools bringing control, compliance and cost savings throughout the entire source-to-pay process.
From sourcing and onboarding new suppliers, to purchasing and managing invoices, Medius enables a streamlined and easy process across the organization.
With efficient, scalable operations in place procurement and finance teams can focus on cost-saving opportunities and cash flow management to support the overall business growth.
With all spend and process data in one cloud-based solution, Medius provides organizations the visibility and insights needed to drive savings initiatives that immediately affect bottom line results. Visit us at www.medius.com.