To Improving working capitalreduce Working Capital through your suppliers, you need to lengthen the period in which you pay your suppliers without impacting the price, quality, service or credit facilities you receive from your suppliers

Do not just start paying all your suppliers late

Prior to making any changes you need to analyse your supplier base carefully and think through the impact (if any) of any changes

For suppliers, getting paid is critical and then getting paid to terms agreed is important

 

 

Reporting

A detailed supplier ageing report by payment due date is a very important report to produce. This report can be used to systematically pay suppliers to terms on a consistent basis. All good finance systems should be able to produce this report

Tracking your ‘Days Purchases Outstanding’ [DPO] is also very useful. (Trade creditors / Cost of Sales) x 365 days. Tracking changes in your DPO as you make changes to suppliers is a good way of measuring progress

Work out what each day’s increase in DPO is work in additional cash to your business. You might be surprised at the size of the number

 

Manual payment processes

If you currently manually select which supplier invoices are due to be paid, we recommend that you move to a systematic approach utilising your finance system and the payment terms loaded onto this system. Make payments based on your supplier ageing by due ate report

This will:

  • improve consistency of payment to suppliers
  • improve your visibility of when suppliers are being paid (managing cash flow)
  • reduce your costs (system based payment file, less calls, less queries, less employee time)
  • ensures your purchase ledger department is accountable for their performance and cost
  • reduce the amount of phone calls received from suppliers (those utilising “a how shouts the loudest gets paid first” approach or those phoning to find out when they are getting paid)
  • time spent dealing with each phone call received (information is easily assessable on the system,
  • improves supplier perception of your being organised and thus increases their confidence they will be paid

With a systematic approach you are still able to manage what is paid and when. You will also know exactly where you are with each supplier at any given point

 

Check your current supplier payment terms

Check the terms of each supplier contract and compare this what payment terms you have in your payment system. Check to see if each supplier is being paid according to the terms in your payment system

It is amazing the number of businesses that pay (some) suppliers earlier than they need to

Ensure that all supplier are paid to terms and not early

 

Categorise your suppliers

You are likely to have a lot of different supplier and they should not all be treated the same. Split the suppliers into categories suitable for your business. A possible split might be:

  • Partner / critical supplier. This might be suppliers to high margin products, supply a significant part of purchased goods or infrastructure or are not easily replaced
  • Important supplier. These are important suppliers to your business but not critical
  • Generic supplier. These suppliers are providing commodity good or services which can be replaced relatively easily, without significant impact on price, quality or service

You might have a different action plan for each category to improve your working capital

Generic suppliers

This is the easiest category to tackle because of your buying power. You may well already have several suppliers for the same item. For continuity purposes it can be good to have two suppliers (in case one fails)

Consolidating generic suppliers as much as possible provides an opportunity to reduce price, increase payment terms and reduce transaction costs (less suppliers to manage)

You might be in a position to simply request that payment terms are increase without any adverse impacts. If you can do this, then do this.

Important and critical suppliers

It is important to negotiate changes with these suppliers to ensure that good working relationships are maintained and there are not or limited adverse changes to prices, services or other benefits you receive

You are likely to spend a large proportion with these suppliers so they are very important to tackle. Making changes may also take time

 

Emergencies

You control your payments to suppliers so you are able to slow down payments to suppliers quickly, particularly if cash availability drops

This should not be done regularly. Careful thought  should be given to what is communicated to the suppliers

 

 

If you would like help to work through options to improve your working capital:

Contact us to have a free initial discussion on how best to approach reducing your working capital

 

 

 

 

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