The right working capital strategy can give businesses the flexibility they need to adapt and thrive in trying economic times, Corcentric Senior VP Robert Johnson writes in the PYMNTS eBook “Baseline 2022: What the Next Six Months Holds.”
Every day we read about challenges in the world, like the war in Ukraine, inflation, and the stock market reaching record lows. Recently the Federal Reserve raised interest rates by 0.75% — the highest increase in 28 years — to help control inflation and stabilize the economy.
With this volatility, it’s important that businesses are flexible and able to quickly adapt.
One way that CFOs are adapting is by continuously reviewing their working capital strategy. With the increasing cost of capital, cash on the balance sheet is important. To improve cash, companies are looking for ways to increase days payable outstanding (DPO) and decrease days sales outstanding (DSO).
To increase DPO, companies should ask these questions:
Often companies find that their terms with suppliers are sporadic and inconsistent. This is not uncommon and generally comes from changes in personnel, previous acquisitions, changes in their ERP, etc.
Some companies try to increase their DPO by paying their bills late. This is not a good long-term strategy because it impacts the relationship with the supplier. Given supply chain shortages, suppliers are finding new buyers that pay on time. and new buyers often pay more for the same product.
Benchmarking against your peers helps determine if you are paying your suppliers too early. If you know one of your peers in the same line of business is paying the same supplier at Net 60 and you’re paying them at Net 30, there is an opportunity for a discussion with your supplier.
With cash a strain and the need to decrease their DSO, suppliers more than ever are willing to offer discounts in exchange for accelerated terms. In previous years, companies would fund this early payment and benefit from the discount. Today, with the importance of cash, many companies are leveraging a credit facility to fund early payments and giving up the discount for DPO benefit.
To decrease DSO companies, should ask these questions:
To improve DSO, it is important for suppliers to work with buyers by sending them invoices in their preferred format. This ensures buyers pay according to the terms on the invoice without delays.
Providing incentives is a good way to improve DSO. More and more buyers work with third parties willing to buy supplies early while still allowing buyers to pay on the standard term.
Looking at the percentage of cash that can be applied automatically is another great way to improve DSO. If the percentage is low, there are third parties for outsourcing parts of or the entire order to cash cycle.
