The Accounts Payable Revenue Centre: Part 2 - Addressing the cash flow paradox
By Gary Simon, BSc, FCA, FBCS, CITP, Chief Executive of FSN & Leader of the Modern Finance Forum on LinkedIn
Liquidity management has been top of mind for CFOs during the COVID-19 crisis and, in all likeliness, will remain a pivotal consideration as organisations slowly emerge from lockdown. Government funding to support employees and businesses will be reducing and it is doubtful that many businesses will be able to fund the working capital requirements of a complete restart. Careful consideration needs to be given to the cash implications of different levels of activity.
Perversely, restarting could quickly lead to ‘over-trading’ because the working capital requirements of restarting outstrips cash receipts. Even businesses that entered this crisis with strong balance-sheets are finding that they are impacted by customers who are struggling to pay – no organisation is immune from the adverse impact that the current crisis may have on cash positions.
For many CFOs, the natural response to a cash crisis is to squeeze creditors by taking longer to pay them. But such actions may be regarded as unethical and, although they could lead to an immediate short-term benefit, are likely to lead to reputational damage and distrust in the medium-term. So, is there a way of managing supplier relationships that balances the cash requirements of the buying enterprise and its suppliers?
In recent years, innovation in supplier invoice processing, especially software support, has enabled an elegant restructuring of the relationship, grounded in a highly automated accounts payable process. Under ‘normal’ circumstances, terms of trade often provide for an early settlement discount, but what if the purchasing company could pay its suppliers even earlier in exchange for slightly better terms on selected transactions, i.e. without renegotiating the terms of trade overall?
In the current environment, the prospect of receiving earlier settlement is very attractive and could constitute a welcome source of additional funding at reasonable cost, helping to offset the impact of delays in customer payments on the other ‘side of the house’.