Category Archives: Finance

Good Working Capital Management is More than Just Timing Payables and Receivables

A few years ago we ran a post on the essence of good working capital management. We noted that, at least from a basics point of view, all one really has to do is:

  • Get a grip on receivables.

    When are the customer payments for sales due? The reimbursements from suppliers for reaching volume tiers due? The tax rebates?

  • Get a clear picture on fixed payables.

    What is the average monthly payroll? Overhead? And projected supplier invoices?

  • Get a good estimate of average disruption costs.

    If a receivable isn’t received on time, what’s the impact? Especially if it could impact a supplier payment schedule which needs to be maintained to insure timely supply.

This is the foundation, but in today’s unstable and unpredictable business environment, that’s not enough to maximize working capital management. To maximize working capital management, one has to maximize the value of the capital. In order to maximize working capital, you need to know when to use capital for internal costs, for supplier payments, and for investments. This means one also has to:

  • Understand the value of early supplier payments.

    Not just the value of the early payment discount, but the overall value to the supplier. If they don’t have to borrow at a cost of capital two or three times the buying organization, and then pass that cost on to the buyer in their overhead, that’s a big potential savings to the organization — even if they have to borrow.

  • Understand the organization’s cost of borrowing.

    If the organization can borrow at a low interest rate of 3% or 4% a year in their home market, whereas a supplier can only borrow at a high interest rate of 12% to 20% in their market, the organization can save by borrowing. But you don’t borrow just to save on costs, you borrow to profit. If you can accelerate production and accelerate profitable sales, borrowing is sometimes a pittance. And if you have good investment opportunities, that could also be a good reason to borrow.

  • Understand the organization’s investment opportunities.

    How much from accelerating production? Improving the process? Investing in R&D? Investing in subsidiaries.

Then, when you have all of this information, you do one more step:

  • Build a Working Capital Optimization Model

    and run it. Input all the receivables, payables, disruption costs, early payment opportunities, borrowing opportunities, and investment opportunities and let an optimization-backed cognitive system help you put a plan in place to not only manage working capital, but profit from it.

SI Won’t Be Paying (or Taking) BitCoin Anytime Soon …

According to a recent Guardian Headline, the Japanese firm GMO Internet will start to pay a portion of its employees salaries in the cryptocurrency Bitcoin in an effort to gain a better understanding of the currency.

While SI sees the value of Bitcoin, especially for global transactions (as this could eliminate the need to manage multiple currencies as all the organization would need to do is manage its in-country currency against Bitcoin), it does not see the value of using Bitcoin for salaries and does not think employees will either. Nor should an employee (or a consultant or even a small businesses) be forced to take the financial risk of being paid in what is essentially a stock at the moment with prices changing, sometimes rapidly, from day to day. Between the time they get paid and can convert their salary to yen, they could have a serious portion of their salary wiped out. That’s not fair.

While companies should get a handle on this, they should be learning by way of B2B transactions, as mid-size to large businesses, with their advanced online banking and trading platforms, and full time financial managers, are not only in a better position to not only exchange Bitcoin for Yen as needed, even on short notice, but also more capable of weathering temporary storms, letting the ‘coin sit during temporary drops, or using it quickly during temporary gains, and using Yen from the bank when it makes sense.

That’s why SI(‘s parent company) will not be paying its employees, contractors, or small business suppliers Bitcoin, and why it won’t be accepting Bitcoin (or any other coin) in the near future. Until more banks are equipped to handle these currencies in their platforms (as true currencies, and not just for [futures] trading), crypto currencies, for the doctor, will remain a C2B or B2B currency.

Fujitsu is Launching a Blockchain Money Transfer Service

Which is a step in the right direction, but it’s not enough.

As per a recent article, Fujitsu Eyes Cryptocurrency Trading with Cross-Blockchain Payments Tech. The goal of the platform is to allow two different cryptocurrency networks to interoperate.

Interoperable networks are the future of supply chain, as per a recent article on we need blockchain, but not for the reasons you think, as, implemented properly, it could allow supply chain partners on different platforms to securely, but openly, trade information that multiple partners need access to in an unalterable way.

But that, of course, is easier said than done. Company X might post that it has a 10 Million Renminbi receivable in China that it wants to trade for a 1.5 Million USD receivable in the USA, but even if that is the exact exchange rate, are the two debts equal? Only if both parties can, and will, pay the same amount at the same time. If one debt is due now and one is due in 30 days, there is a cost of capital if one organization has to borrow in the interim to meet cashflow requirements. Also, if both debts are due in 30 days, something could happen within 30 days that would result in one organization being unable to pay its debt for 60 days, and this again could result in a cashflow issue for one party that traded a debt.

As a result, unless both parties pay into a network and the funds can be immediately transferred, then you need a network where parties are trading at negotiated discount rates (subject to credit ratings or other agreed upon factors), and that could get tricky.

We could be left with a situation where each IOU is auctioned off to the highest bidder in one of the counter-party currencies of choice (1.4M USD, 1.0M British Pounds, etc) or the situation where each block is put up with a (set of) offer requirement(s) and the first offer takes it. In the first situation, which requires a fixed time auction over block chain, you have a lot of overhead (and blockchain’s primary application — bitcoin — already takes too much energy), and the second case this could leave trade possibilities on the table.

Unless a truly global currency facilitation fund where a number of entities establish a global bank, each funding in their own currency, and agree to pay out debts in the local currency in an established timeline for each IOU placed on the network, the dream could stay that, a dream. But with a global organization, the global organization would do its own risk checks, insure the risk is acceptable, and then take a cut just like supplier networks and payment networks take a cut. It would be like a bank or an invoice factoring network, but could offer lower costs as it wouldn’t need to exchange currency all the time, could weather currency storms, minimize global transfer (and global transfer costs), and generally improve global trade efficiencies. Just like the Knight’s Templar did when they effectively established one of the first global banks.

What we’re asking is not an easy network to design, but one we need to be thinking about.

Buyer Beware! A Tax Efficient Supply Chain is Not a Tax Effective Supply Chain!

Many global consultancies with large tax practices and some supply chain capability like to preach tax efficient supply chains and how they can help you optimize your global supply chain to minimize the overall tax that you pay. As many multinationals know all too well, sometimes the biggest cost after the product cost is not the logistics cost, but the tax. Depending on where you are buying from, where you are storing your goods, and where you intend to sell the goods, you can end up paying a plethora of taxes that can add up real fast.

The country you are buying from likely imposes federal and state taxes on all sales, and might even impose municipal taxes as well (especially if there is a value-added service component). Then you have to get those goods to a port (air or sea), and guess what, there will be taxes on the transportation. Then the dock or carrier likely charges a loading service fee, which is, of course, taxed. And let’s not forget the export duties. Ka-ching! And then there’s the air or sea transportation tax (as the carrier is registered somewhere). And, of course, landing/docking unloading fees when you get back to land. And then, Free/Foreign Trade Zone be damned, when you (finally want to) import those goods, import duties! Ka-ching! Then you have local transportation costs, taxed, and local warehouse costs, taxed, and even final transportation costs to the store or consumer, taxed again. Taxes. Taxes. Taxes. And if you have to pay all those taxes, you might as well just source from the closest factory because, regardless of how much more their unit cost is, we guarantee it will be cheaper.

However, if you have what the tax consultants call a tax efficient supply chain, then, because you are theoretically sourcing from countries you are not doing (much) business in (or selling in), then your organization is not responsible for most of these taxes, and the rest of the taxes, through clever classification and trade agreements, are minimized.

But just because you are not responsible for a tax doesn’t mean that you don’t have to pay the tax up front (and then file for reimbursement later). In many countries, unless you have an exemption id to provide the seller or [logistics, etc.] service provider (which may or may not exist or which might only be granted to non profits, etc.), the seller / service provider still has to collect the tax. And if it takes six, nine, or even twelve months to recover the tax, this is not exactly tax efficient.

First of all, your working capital is tied up, and there is a cost to having this tied up, which is the greater of what it costs you to borrow that working capital from your lender, the average early payment discount you are giving up, or the investment opportunity your Finance department has at its disposal (through factoring, short term GICs, etc.).

Secondly, there is a cost associated with the recovery of that tax. It will consist of at least the time required to submit the paperwork for recovery, and fees associated with submitting the paperwork for recovery, and, if the process is so involved or onerous that you really need a best-of-breed software solution to help you, the cost of that solution. (Note that you might need multiple such solutions, as many as one for each country you have to to through a submission process as some countries might only certify in-country vendors to connect to their e-document submission systems or accept, without [mandatory] audit, documents produced by an in-country provider.)

Third, and most important, the supply chain is not cost efficient if the cost of minimizing the tax ends up creating a considerably more dispersed supply chain that ends up significantly increasing the logistics cost, and, as an effect, the overall cost. Tax efficiency is supposed to minimize overall cost and cannot always be considered on its own.

In other words, unless the consultant creates a model that takes all of this into account (and many don’t due to the overall complexity of such a model), the “tax efficient” supply chain is not a “tax effective” supply chain and is not necessarily one you want to pursue.

Oversight for more than just your Travel & Expense budget management

Oversight is an Atlanta-based software (as a service) company founded back in 2003 to help organizations monitor spending in an effort to identify errors, waste, misuse, and fraud in the grey area of enterprise spend. As every recovery firm will tell you, the average organization will overspend by 1% to 3% as a result of over billings, duplicate billings, unnecessary spend on superfluous demand, maverick spend, and even fraud. (And they make their living recovering a portion of that, typically a third, and then charging you 33% of the recovery as their fee. Sounds small, but 1/3 of 1/3 of 3% of spend is 0.33% of spend, and if the organization spends 100 Million, they get 330,000 for an effort that can be largely automated and, even worse, be avoided with proper up-front spend monitoring.)

For example, if all invoices are compared to invoices and goods receipts before payments are authorized, this can prevent overpayments. Duplicate billings can be identified in the same way (and duplicate payments prevented). Potential fraud can be identified by forcing all invoices from unknown suppliers, for unknown products, or for unexpected amounts to be manually reviewed. (This can’t prevent in-house fraud, where a buyer pays a fake invoice to a fake company controlled by a relative, or a co-conspirator, but it can prevent external fraud.) Unnecessary spend on superfluous demand will require up front requisition control, as will maverick spend, but at least there will be no overspend or duplicate spend that can be unrecoverable once the contract with the supplier expires.

Oversight is unique in that it is not so much a software platform but an insights platform. Employing a team of data scientists focussed on identifying new algorithms and techniques for fraud detection, Oversight uses their in-depth knowledge of fraud to build solutions that will help the clients identify potential cases of fraud that they could never hope to identify on their own. The best most companies can do is sample based audits and spot checks which are unlikely to identify much fraud as these will generally only be on a few percentage of invoices or transactions, and most employees who have been getting away with fraud for a while will not be doing anything obvious, and the fraud will not be detected without correlations across documents and systems. That’s where Oversight comes in.

The Oversight solution is a web-based software solution for automatic spend analysis and identification of high-risk or potentially fraudulent transactions that comprehensively analyzes T&E, purchase card, and accounts payable spend using a suite of statistical, clustering, data mining, break point, rule-based, evidentiary reasoning, and machine learning algorithms that look for discrepancies, suspicious patterns, known fraud, and risk indicators to identify those transactions that need to be manually reviewed. The dashboard-driven, or work-bench driven, interface allows an analyst to drill into suspicious transactions by country, organizational unit, risk level, or exception type and can be configured to show the analyst only those exceptions assigned to her, or her team, or every unresolved exception in the system.

When a user drills in by exception type, she sees an overview of the overall risks by country and can drill into suppliers to see the specific exceptions. When a user drills in by country, she can see the overall risk by supplier and then by exception. In other words, she can drill into at-risk transactions using country, organizational unit, supplier, and at-risk type in any manner they please.

Or, they can look for exceptions by process. Right now, Oversight supports the identification of at-risk transactions in the travel & expense, procure to pay, and purchase card processes and has recently added support for FCPA, Anti-Bribery, and Corruption Risk — including the identification of known politically exposed parties.

Plus, the platform not only integrates with all of the big supplier and financial data providers — such as Dunn & Bradstreet, Bureau van Dijk, and CreditSafe — but also integrates with providers of risk indicator data such as Ecovadis and Sedex Global. Plus, they maintain their own databases of known politically connected parties, gentlemen’s clubs, denied parties, and other parties that an organization typically should not be allocating funds to. This last capability is quite important … just ask American Express which once received a 241K strip club bill authorized by the CEO. (Source)

Since fraud attempts differ by country, and collusion is hard to detect with a standard m-way match invoice processing platform, Oversight brings a powerful offering to the expense management space. It’s a platform worth checking out. For a deeper dive into the platform, check out the recent coverage by the doctor and the prophet over on Spend Matters Pro [membership required]. (Part I is up with Parts II and III coming within a week.)