Published Tuesday 17th November 2020

When most people think of working capital, they will often start with solutions centred around funding, customer receivables or inventory management. Usually, stretching payment terms is the only thing that will be done with suppliers. Even then, many smaller companies are sceptical of how much can be achieved and therefore tend to ignore payables as an opportunity. In this article we will highlight the purchase ledger cashflow opportunities that might be right under your nose.

1. Payment Terms

Changing payment terms can be difficult if your suppliers are bigger than you. And it is important not to be too aggressive with some suppliers, since you do not want to drive them out of business. That’s why we use the database to understand what payment terms are being offered by your suppliers to other companies. There are over a million data points to compare and it allows finance and procurement to understand how reasonable current payment terms are and how much to safely stretch those terms.

2. Early Payment

It is a surprise to most companies that they pay at least some suppliers early. There will always be emergencies, where paying before the due date is a legitimate course of action. But all too often, early payments are going on without the knowledge of procurement or finance. Stamping out these early payments can accrue significant cash flow benefits.

3. Losing Supplier Discounts

It is common that supplier settlement discounts are lost because invoices cannot be processed in time. The first step is to understand how many discounts have been lost and then to focus on those supplier invoices to speed up processing.

4. Payment Runs

If we assume that payments will be made weekly rather than daily, cashflow will be saved. It is also important to understand the best day of the week to make payments from a cash flow perspective. Our analysis can give the exact answer to maximise this quick win.

5. Payment Clock

A common problem in a payables department is that the supplier is slow to get invoices to their customer. On average this delay is between 11 and 14 days. This is much longer than any delay caused by postal services. The biggest reasons for this delay are the batching up of invoices, often on a weekly basis, or small service suppliers being very slow to raise the invoice in the first place. Our recommendation is to change the way due dates are calculated so that the “payment clock” starts from the date of invoice receipt and not from the date of the invoice. Suppliers will then be encouraged to speed up the dispatch of their invoices. Experience shows that only 5% of suppliers will make changes to their billing routines as a result of this change.

Free Working Capital Review

Here at Expense Reduction Analysts, we’ve worked with many major UK businesses over the last few months, helping them to consider their cash flow cycle and unlock material sums of working capital previously trapped in the supply chain – and quickly.

ERA are offering a free evaluation of your working capital which will pinpoint the exact opportunities in your payables ledger; arrange a time to talk you through the results and map out the actions required to realise reduced working capital and reduced cost of financing. Contact us today.

About the Author: Harvinder Rattan, is an energetic business leader with more than 20 years’ experience in finance and business transformation. His excellent people skills allow him to quickly and easily engage stakeholders in order to win hearts and minds to drive effective change.