Treasury – the cash guardians
Without cash, your business is dead. It’s as simple as that.
This applies equally whether you are living in the Middle Ages and need your bank account filled with gold to fund your army, build your castle, etc. or the modern day and you need to buy raw materials, pay staff and purchase capital equipment.
The job of today’s Treasurers as the cash guardians is therefore critical, making sure that enough cash is available, at the right time, in the right place, to fund the business’ operations. As a result, Treasurers are inclined to become hoarders, saving up cash for a rainy day.
Your role used to be defined by ensuring that the company builds up as much working capital as possible (including extending Days Payable Outstanding (DPO) or reducing accounts receivable payment terms) and holding onto this cash in the market, which in the good ‘ol days would earn APRs of 15% or more.
Today, that world is completely different.
Banks and other investment vehicles are no longer the safe havens once thought to be, and the rates of return are abysmal in a near zero interest rate environment. Putting cash under the ‘marketplace mattress’ is no longer the good option it used to be.
So what can Treasury do?
Top 3 Reasons to Invest In Your Supply Chain Through a Discount Programme
Similarly to the princes of Procurement, the princes of Treasury are moving from a critical role of keeping their company’s cash safe into a more strategic one where they are tasked with not only strengthening working capital, but also strengthening their overall supply chain.
One key opportunity here is to use your company’s excess cash to invest back into the supply chain to fund a discount programme - what we call dynamic discounting.
1. Receive even higher returns.
You set the rate of return with discounting programmes, so depending on the size and cash needs of your suppliers, you can choose to set the APR anywhere from 3% for your largest, most strategic suppliers, to 15%, 18%, 24%, etc. These are obviously favorable in comparison to the 1% returns that are available on the marketplace.
Think of your organization’s annual spend and multiple that by .01. Now, take that original number and multiply it by .15. In a small-scale, simplified example, a company with $1M in spend can earn returns of either $10,000 or $150,000. You decide.
2. Minimize risk effortlessly.
The high returns of 15-24% on cash invested in a discounting programme also come with a near-zero risk. This is an investment in invoices that are already approved, and just waiting to be paid. By automating supplier discounts, you can offer discounts on all invoices as soon as they are approved and add millions to the bottom line - without even thinking about it.
3. Get special treatment from your suppliers.
A discounting programme strengthens supplier relationships - by giving suppliers fast and easy access to cash at competitive rates trading relationships, and the entire supply chain are strengthened. This, in turn, makes the business stronger and ultimately, more competitive.
However, this type of thinking requires a new approach. After all, Procurement normally owns the relationship with the supplier and Finance owns the payables process.
The only way to put your working capital to work, reinvest in your supply chain and introduce a supplier discount programme is to break down the walls and start working collaboratively, across the fiefdoms!
Get the know the princes of Procurement in last week's blog post, and check back next week to meet the princes of Finance.