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Over the past few years, the office of corporate finance and procure-to-pay processes (buying and spending) have undergone significant and sweeping changes. Supporting key functions that lie at the very heart of every organization, corporate finance, accounting and procurement departments carry out weighty objectives, such as meeting regulatory standards and ensuring accuracy in financial reporting.
But today, with the coronavirus pandemic, economic uncertainty worldwide is growing. And these enterprise functions are taking on even more strategic import as they man the corporate rudder and work to pilot the financial ship through this maelstrom of uncertainty.
For CIOs and IT professionals to be on top of their game, they must understand the underlying drivers of these new buying and spending strategies – the new and emerging business requirements and their technology implications.
Working Capital is Key
Before moving forward, it’s important to review an important key concept at the center of today’s new world of corporate finance – working capital. Working capital is a financial metric which represents operating liquidity available to a business and is calculated by tabulating current assets minus current liabilities.
If current assets are less than current liabilities, a working capital deficiency will result, and it will lack the cash flow needed to support day-to-day business activities. It’s the job of the CFO, treasurer, and/or controller to ensure this doesn’t happen by putting in place the right working capital strategies by managing inventories, accounts receivables (what is earned) and payables (what is owed), and cash (loans and investments).
While numerous ways exist to free up net working capital, many organizations are challenging the age-old practice of increasing available net working capital by paying invoices owed to suppliers late to benefit from the “float.” While paying suppliers late has been part of the finance playbook for many years, it can put suppliers at an economic disadvantage – contrary to a key corporate objective of de risking the supply chain.
Many finance execs are maximizing savings opportunities through early payment discounts. The practice of early payment discounts is when the buyer secures a price cut (discount) on the goods and services procured if they pay the invoice before the due date. But having the option to do so can be beneficial, to realize the significant opportunity that exists to monetize payables to achieve risk-free returns, in lieu of, or in addition to, more traditional working capital strategies.
Technology Implications
The early pay scenario is a huge paradigm shift, and cloud computing, analytics and dashboarding are all playing a key role in supporting these new finance strategies.
One of the biggest challenges companies face is a lack of collaboration. The controller is in charge of the accounting department, whereas the treasurer oversees the finance department, and CFOs generally work with the corporate treasurer to devise strategies to optimize cash flow. This leaves the controller and the procurement and accounting departments left out of working capital strategy discussions when in reality all must be brought together. Ensuring everyone has access to dashboarding functionality can help improve collaboration via shared data.
When payables are viewed as an opportunity to gain back what can be a significant amount of revenue, quite understandably there is now a new urgency to create expediency by automating the invoice-to-payment cycle to capture these new revenue streams. Aside from shortening cycle time, it can free up personnel to focus on more strategic activities such as analysis.
Of course, it’s not necessary to accept all early payment discounts offered; in this respect having insights to determine exactly which suppliers it makes sense to pay and when is critical to forecasting and cash planning. Analytics to provide the pertinent data in real-time, including competitor benchmarks, can help organizations track performance and navigate effectively in the “new normal” environment.
Cloud computing, analytics and dashboarding can provide the foundation to foster new and creative working capital strategies to ensure organizations can continue to drive growth and profitability in both the best and worst scenarios moving forward to stay on path to profits.
Daniel Saraste is Senior Vice President of Strategy and Innovation at Medius.