Get working-capital savvy: Extend your DPO without extending credit terms

Suppliers beware – recent research performed by The Hackett Group revealed that almost one third of companies it studied planned to extend their supplier payment terms as a method of improving working capital metrics.*

Sadly this is not a surprising statistic; as large corporates look to address their internal cashflow problems (and help solve their CEO’s ailing stock price), the financial buck can easily get passed down from buyer to seller.

Extending your days payables outstanding (DPO) can be an effective solution but, without careful consideration of the implications, it can also be a crude one.

Before rushing off to damage your supplier relationships, ask yourself if you have the full picture of what is happening in your account payables/receivables department –how much is being spent, with whom, by whom, for what and on what terms? This will allow you to better target your strategy and minimise the impact on your suppliers. 

Achieving visibility will help influence your working capital strategy. According to Visa’s Cash Flow Visibility Index, 2016** there is a clear correlation between the ability to react to market changes that affect business and greater cash visibility. The research reveals that Australian-based companies are more proactive in establishing these strategies and the benefits soon follow. Typically, more Australian corporates achieve visibility than elsewhere in Asia, for example.

A natural extension of visibility is the establishment of sophisticated strategies to resolve working capital problems. It is therefore no surprise to hear Australian-based companies lead the pack in introducing data-driven supplier payment solutions.

As CT reported this month, large global companies such as SGS, which specialises in testing and verification of traded goods, has been on a strategic push to increase net working capital. In Australia, for example, it has succeeded in bringing it down more than 50% from a double to single digit percentage point.

SGS used to pay suppliers through electronic funds transfer. When an invoice was due for payment, cash payments were made according to the invoice date.  By adopting a 16-digit Virtual Account (VA)-based strategy, SGS is not required to pay until the credit line due date, up to 30 days later. So, if a supplier draws down the funds owed to them on day one, the virtual account issuer finances the remaining 29 days for the buyer. The net impact is just like using a credit card. SGS has practically doubled its DPO to 60 days with some suppliers.

There is mutual benefit for supplier and buyer in this type of virtual account payment arrangement. The buyer is in a position to extend its DPO, while the supplier can drastically reduce its days sales outstanding. 

Visa works in exclusive partnership with Invapay – a cloud-based payments service provider – to deliver these solutions for clients wishing to enhance their domestic payments performance and achieve working capital gains. In Southeast Asia, for example, the two are working with UOB to serve a Japanese technology company NEC with similar working capital needs.

So how does it work? A corporate can obtain a 16-digital VA from an issuing bank. The buyer will select the suppliers they want to be onboarded and, with their permission, all necessary accounts payables files of the buyer are delivered to Invapay for processing. The payments are then made by the VA to Invapay, which disburses the funds via electronic transfers – irrespective of whether the supplier accepts VA or otherwise. The buyer will then clear its outstanding balance with the VA issuer on a pre-agreed date.

For the supplier, they can achieve earlier payment but equally important, the payment is guaranteed as it originates from a VA (ending the problem of the bouncing cheque). The supplier still has payment risk, but it does not assume the credit risk should the buyer fail to pay their bill. In this instance, the bank is underwriting the credit line as well as issuing the VA.

It also can improve reconciliation for the payer as the service provides detailed invoice data, allowing them to see the breakdown of what is owed and how many invoices are outstanding.

Click to enlarge

Source: Visa

The strategy doesn’t need to end there. Using a VA can provide a host of payment options specifically suited to the needs of both parties. In some cases, the buyer may wish to negotiate a discount on the face value of an invoice if the supplier wishes to obtain payment even earlier than normal.

Onboarding is straightforward, with no associated costs and little time spent on integration. Once Invapay has the AP file, the supplier’s name and bank account number, they are effectively onboarded and ready to go.

It’s certainly better than just doubling the time you take to pay a mission-critical partner in you business, that’s for sure.

Hanson’s supplier payment solution

Part of the Heidelberg Cement Group, Hanson Australia was looking for a way to boost its cashflow. Unlike the examples stated above, the construction materials supplier was looking to work with third-party contract staff where no formal supplier relationship had been set up.

Given its needs, Hanson worked with Citi to launch its award-winning commercial supplier payment solution. The system uses Visa-Invapay technology and combines Citi’s commercial VA solution to pay suppliers who typically don’t accept this type of payment – removing the need for suppliers to have a merchant facility.

Implementation was achieved in under eight weeks, with automation and integration into Hanson’s ERP. Hanson’s suppliers benefit from receiving timely and transparent payments, while both buyer and supplier have access to valuable payments transaction data via Invapay.

With auto reconciliation for Hanson, their suppliers and Citi, Hanson’s procurement team can focus its attention on more strategic tasks.

For more information, please contact your Visa bank representative

* June 14 article by Spend Matters. 

** The fieldwork for this second round of the Visa Cash Flow Visibility Index took place in the first quarter of 2016. A total of 806 of the top 1,000 revenue-ranked corporations (based on secondary data sourced by East & Partners Asia) across ten markets in the region participated.