Category Archives: Finance

Early Payment Discounts vs. Early Payment Rebates

Are we dealing with six of one and half a dozen of the other? After reading “The Art of the Play” (PCubed.com), I have to wonder.

They are different in that you get one right away and you get the other later, and they are different in that one is just a reduction in spend and the other can be treated as an income stream, if the CFO so desires, but in the end they both have the same effect on the bottom line — less spend.

So why would an organization favour one over the other when the big difference is capturing the savings now versus capturing the savings later? If the organization was limited in cash and was trying to maximize savings, then capturing the savings right away would definitely make more sense, but if the organization was flush with cash and the supplier offered tiered rebates that improved with volume, then the organization might want to wait until later. Otherwise, the doctor can’t see much of a difference.

However, one area where there is a big difference is paying for a platform vs. paying for a service, especially for a big company. For example, the Oxygen Finance model described in the article is to provide you with a service where you pay up to 50% of the discount or rebate captured by transaction. While this is a good deal for a mid-sized company that might not have the up-front cash required to implement the end-to-end e-Procurement solution required to effectively take advantage of discounts and rebates offered by suppliers for quick payments, this can be a very expensive solution for a large enterprise. Consider a company that spends 250 Million a year, the low-end of the market for Oxygen Finance. If the average rebate is 1.5%, and you give one third of that up to the service provider, then the organization is paying 1.25 M a year for the solution, and only achieving a 2X ROI.

A company of this size can acquire a SCF solution for a fraction of this cost and realize a much larger ROI.

When you dive in, you realize that there are only three reasons most companies can’t create or take advantage of most of the early payment discount and rebate opportunities available to them:

  1. Invoices aren’t getting in the system fast enough
    because most of them are coming in as (e-)paper.
  2. Approved invoices aren’t getting to AP fast enough
    because routings for approval take too long.
  3. Procurement doesn’t have the manpower to negotiate rebates on 100% of spend
    because there are too many suppliers.

And while these were valid problems a few years ago, without (m)any real solutions (that an average organization could afford), today:

  1. An organization can acquire a SaaS end-to-end invoice automation framework, such as the one offered by Nipendo, that will convert all incoming invoices into one standard e-format for six figures.
  2. An organization can acquire a number of rules-based e-Procurement and invoice automation solutions (including Nipendo‘s) that will automatically approve and route all error-free invoices that match a PO or contract to the AP system and route those that require manual correction or approval to the right individual for online (e-mail) approval.
  3. An organization can see significant returns addressing only 80% of the spend which is typically with less than 20% of the supply base.

An organization that takes this approach can typically acquire a solution for (much) less than 500K a year, save 1.5% on 200 M of spend, and see a (minimum) 6X return, which is the return you should be looking for from an e-Procurement solution.

Maybe there’s another reason for a large enterprise to go transaction-fee SaaS for discount and rebate management, but if there is, the doctor ain’t seeing it — and he’s been covering SCF for years. As far as he is concerned, the sweet-spot for transaction-fee SaaS for discount and rebate management is the 50M to 250M range, because the implementation cost of the necessary end-to-end e-Procurement, invoice-Automation, and SCF solution isn’t that much cheaper for a mid-sized organization than for a Global 3000, and at less than 200M of addressable spend, the ROI multiplier starts to drop considerably.

Any differing opinions?

Supply Chain Finance: A European Bank Perspective

Late this spring, the Euro Banking Association (EBA) released their “Supply Chain Finance European Market Guide”. This gives us some insight into the European Bank Perspective on Supply Chain Finance.

The guide defines Supply Chain Finance (SCF) as the use of financial instruments, practices and technologies to optimize the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners. It then goes on to state that SCF is largely ‘event-driven’ and that each intervention (finance, risk mitigation or payment) in the financial supply chain is driven by an event in the physical supply chain.

The EBA then goes on to state that the key categories of SCF are:

  • Buyer-Centric Accounts Payable
    Also known as “Approved Payables Finance”, “Reverse Factoring”, “Supplier Finance”, or even “Confirming”, it’s generally based on discounted payment of accounts payable in favour of suppliers by accessing a financial institution’s liquidity. “Dynamic Discounting” is a related instrument.
  • Supplier-Centric Accounts Receivable
    Also known as “Receivables Finance”, “Receivables Purchase”, and “Invoice Discounting” or “Invoice Factoring”, it’s where a supplier finances their operations by factoring their invoices or taking loans against the receivables.
  • Inventory-Centric Finance (PO/Inventory Finance)
    Which can be used by the supplier to gain financing based on a PO or a buyer to gain financing based on inventory.
  • Bank Payment Obligation (BPO)
    As described in this recent post on how it took 40 years, but BPOs are now truly SWIFT, a URBPO (under ISO20022), provides an irrevocable payment guarantee in an automated environment and enables banks to offer flexible risk mitigation and financing services across the supply chain to their corporate customers. An alternative to L/Cs (Letters of Credit), it is a new middle ground between L/Cs and Open Account finance which can be used to offer pre- and post-shipment finance.
  • Traditional Documentary Trade Finance
    Letters of Credit and related trade loans.

In other words, supply chain finance is simply

  • a bank or third party lending the buyer money based on inventory;
  • a bank or third party lending the supplier money based on POs, invoices, accounts receivable, or BPOs; or
  • the buyer paying the supplier early for a discount.

And the primary mechanisms by which a supplier gets financing is:

  • receivables, BPO, or L/C financing from a bank,
  • discounting or dynamic discounting from the buyer, or
  • factoring from a third party.

This is a traditional supply chain finance definition and these are, with the exception of the new SWIFT BPO, the traditional mechanisms, so the guide is good in this respect. And it also has a good discussion of risk. However, when it comes to a discussion of automation, it is pretty much limited to e-Invoicing and this is a problem. e-Invoicing is just the foundation — technology has to go beyond just e-Invoicing if SCF is going to not only take off but become a pillar of supply chain support. But that’s a topic for a future post.

Your Best Secret Weapon Against Bankruptcy? e-Invoicing and Supply Chain Finance

Right now, you’re probably scratching your head and saying you’re biggest secret weapon is better marketing and advertising to get more people to buy your product and keep the cash coming in. However, the real problem, especially for any company in the supply chain that is not customer facing, is the inbound cash-flow. Every month employees have to be paid, overhead costs have to be paid (or the lights go off and the doors get locked), and (starving) suppliers have to be paid. This can only happen if the company is paid, or has access to cash until it gets paid.

Inbound cash-flow is a serious problem, especially as more and more companies extend DPO terms across the board. It’s so bad in the UK that the government established the Late Payments of Commercial Debts Regulations to protect small businesses struggling with cash flow due to late payment of invoices. Cash-flow problems, and chronically late payments in particular which are topping 120 days (or more) in some verticals (especially in the UK), and not lack of customers, are now causing more bankruptcies than business failures (as there is no lack of customers). As far back as 2008, 4,000 UK businesses, which represented at least 40% of bankruptcies in 2008 in the UK, failed as a direct consequence of late payment! And that percentage is increasing.

So how is e-Invoicing going to help? One of the many advantages of proper e-Invoicing is that a buyer gets an invoice almost as soon as you submit it (as transmission over the internet typically only takes a few seconds at most) and can send a receipt thereof to your system immediately. If it’s a customer you have a contract with, then you have options. If they are cash-rich, and amicable, you can offer them early payment discounts that will save you both (if the alternative for you is borrowing at 20%). If not, and the customer has a good credit rating, you can put the invoices out for factoring on a Supply Chain Financing hub and get them factored at a much better rate than your local bank (that might struggle with a simple international wire) will give you.

Done right, as long as you are selling enough to meet your operational costs, e-Invoicing and Supply Chain Financing could save your hide when your competitor goes out of business. They truly are the best secret weapons you might have against bankruptcy (especially given that over 80% of invoices are still paper in many countries).

While You Were on Summer Vacation, Vendor Posts, Part III

While you were on summer vacation, SI was powering away with daily posts and continuing to cover some of the leading vendors in the space, presenting a number of deep dives on their technology platform. Here is a short recap of some of the coverage you might have missed!

Airclic

Designed to make 3PL deliveries click, Airclic’s Transport Perform solution, which is tightly integrated with their new Route Planning and Route Optimization solutions, incorporates support for simultaneous high-volume cross-docking and multi-driver cross-border routes in a new web portal that makes their platform as easy to use as a multi-tab spreadsheet. One of the highlights of their solution is a clear, easy to use, non-distracting, straight-to-the-point interface for dock workers and truck drivers, especially when all these people have is a small, primarily text based, mobile device. The application, which can be pre-configured with relevant supplier data, including whether the supplier is ASN-based or non-ASN-based (Advance Shipping Notice), allows the application to be customized to each supplier so that a dock worker or driver only has to enter the absolute minimal amount of information (which, for an ASN-based supplier, can be as little as scanning a barcode) and when additional data has to be collected, is presented with a minimal list of options to choose from.

PrimeRevenue

In our posts on how they are priming your financial supply chain for success (Part I and Part II), we introduced you to PrimeRevenue, a provider of Supply Chain Finance solutions that provides supply chain finance solutions to over 12,000 customers in 40 countries and that processes Billions of dollars of transactions each year. Like other providers of supply chain finance solutions, they provide a platform that helps suppliers access financing for their receivables when they need it from over 40 leading financial institutions. But that’s not the best part of their platform. The best part of the PrimeRevenue platform is a solution by the name of SciMap that provides a consolidated and classified analysis of your spend, enriched by insights from PrimeRevenue’s global database, based on detailed and updated market intelligence. This allows you to make better buying decisions as well as negotiate optimized payment terms, putting the power to improve your working capital in your hands.

iValua

In our four-part series on how they are proving their mettle with source to settle (Part I, Part II, Part III, and Part IV), we noted how iValua is one of the few providers tackling end-to-end sourcing and procurement in a single suite of integrated modules built on one common platform. With capabilities that, to some degree, address each of the core phases of the basic sourcing-and-procurement cycle except decision optimization and tax reclamation, the platform is one of the most extensive native source-to-settle platforms out there. Integration and implementation will take time, especially if your organization wants the full end-to-end capability, but could be worth it for a large organization that needs an extensive, integrated solution.

PrimeRevenue: Priming Your Financial Supply Chain for Success, Part II

In Part I, we discussed how PrimeRevenue, a provider of Supply Chain Finance solutions that provides supply chain finance solutions to over 12,000 customers, including a large number of Fortune 500 and Global 3000 companies, in 40 countries and that processes Billions of dollars of transactions each year, provides a supply chain financing solution that goes beyond just providing a platform to sell receivables and includes an analytics component that helps a buying organization figure out how to best meet its working capital needs.

In particular, as part of their platform, they provide a module by the name of SCiMap that provides a consolidated and classified analysis of your spend, enriched by insights from PrimeRevenue’s global database, based on detailed and updated market intelligence that allows you to make better buying decisions as well as negotiate optimized payment terms, putting the power to improve your working capital in your hands. It does this by analyzing all of your spend data, presenting you with potential opportunities for payment term extension, and providing you with a what-if analysis platform that allows you to tailor a plan to meet your needs in a manner that is consistent with your level of risk.

The potential opportunities for working capital improvement are summarized on the unique SCiMap dashboard that summarizes:

  • Commodity Standard Opportunities
    for which commodities are you paying faster than market average?
  • Vendor Standard Opportunities
    which vendors are you paying faster than your competitors?
  • Parent Standard Opportunities
    which vendors are you paying faster than the average time in which their parent or sibling organizations are paid?
  • Country Standard Opportunities
    which vendors are you paying faster than the average DPO for the country?
  • Cost Neutral Opportunities
    which vendors could be paid later with no impact to their finances? (e.g. they
    are cash rich while you are cash poor or they are financing at 90 days and you are
    paying at 60 days)
  • Discount Opportunities
    which vendors could you convert from early payment discount terms (that they are
    unable to effectively take advantage of) to standard terms?
  • Inventory Turnover Opportunities
    which terms could be extended to match inventory days and associated carrying costs?
  • Buyer Standard Opportunities
    which vendors are you paying faster than your average payment terms?
    (note that if your average payment terms are worse than market averages, these may
    not be real opportunities)

From this dashboard, that will typically identify hundreds of millions of working capital that could potentially be freed up in a typical multi-billion dollar company within a matter of weeks, a senior Supply Management analyst can dive into each pot of opportunities, identify the commodities and vendor in question, access the credit-rating and average finance rate for each vendor, and determine if the opportunity is real or not. SCiMap can even do program design to help procurement determine what suppliers will be targeted first based on different criteria to maximize the opportunity.   From here, the buyer can identify the real opportunities for working capital improvement that will not endanger the vendors or increase the overall supply chain cost to the end consumer. The Supply Management analyst can then create a term extension model that will benefit the organization without hurting the supply chain.  Then in SCiMap procurement can report what actually happened in execution to see where the model was successful or had challenges.

This is important because, despite the best efforts of your accounts receivables department, receivables collection will only take an organization so far, which means the organization will have to hang on to cash longer to improve working capital at some point. Inventory optimization will help, but if the Supply Management organization is mature, inventory will have been optimized long ago and there will be no more opportunities to improve working capital. Furthermore, during periods of prolonged recession, you know that Treasury is going to demand term extension as a way to improve the cash position of the company, and you have to be prepared for this because you know better than everyone that you can’t just increase payment terms from 60 to 90 and not negatively impact your supply chain. Not only will some suppliers be unable to bear the term extension, others will take back the benefits that you negotiated in exchange for faster payment. Preferred customer status and order fulfillment during a supply shortage? Forget it! Faster-than-guaranteed response times on service? Dream on! Marketing perks? Ha ha! And let’s not forget the fact that if you are already paying some vendors slower than market average for the commodity, vendor, or country, you might be paying more than you have to and speeding up those payment terms might decrease your overall costs – not having to pay at all improves working capital much more than paying late.

The SCiMap solution, which is unique, is a must-have for any organization that wants to truly optimize it’s working capital in a way that won’t come back to bite it in the @ss at contract renewal time, especially when you consider the fact that PrimeRevenue has analyzed trillions of dollars in spend and will only present you with opportunities for consideration that are real for at least one group of companies in the global supply chain. While all the opportunities may not be real for your organization, you won’t waste time analyzing commodities or vendors that obviously cannot handle a term extension. This gives you the ammunition to push back on Treasury or the C-Suite when they get the hair-brained idea that just because their competitor was able to increase payment terms by 30 days and get away with it that your organization can too.