Neil Radley is the non-executive director of Invapay, a FCA regulated business which specialises in innovative procurement and electronic payment solutions – from payment & procurement products through to full financial platforms that provide greater financial control, visibility and compliance.
Here Neil challenges the conventional wisdom of the combative buyer/supplier relationship, proposing a surprising solution that will create a significant revenue stream for the buyer, a three day settlement for the supplier and techniques to reduce negative cashflow.
I don’t know about you, but the more information we seem to be presented with the less the facts stack up. At 7.1million recorded cases for the year ending June 2014, crime is down 16 per cent compared to the previous year, according to the Crime Survey for England and Wales. It sounds great but the crimes recorded by the police in the same period were flat at 3.7m cases. Have people given up on going to the police? Or are the police statistics wrong? Who knows? There was a significant increase in the volume of fraud recorded (8 per cent year on year), though questions are raised as to what extent that reflected an improvement in recording practices, an increase in public reports or a rise in actual criminality.
I feel the same when I see the latest corporate lending figures. Overall the lending figures are still way down compared to 5 years ago. There are howls in the corridors of power as the politicians blame the Banks for clamping down on credit. The Banks retaliate by telling us that they have lots of money to lend but there is a lot less demand than previously. The Breedon Report warns of a £191bn funding gap by 2017, but then the British Bankers Association weighs in and tells us that actually, for SMEs, cash holdings outweigh borrowings by £48bn (up 12 per cent year on year). Peer to Peer business lenders are sprouting up like new season vegetables, followed closely by non-bank lending funds lending direct to businesses. As if that were not enough, non bank lenders now lend to businesses via Peer to Peer lenders… What is a sane person to make of this?
There are a lot of vested interests in the current model and since many of those involved are not sane then it’s always going to be a difficult rhetorical question to answer! Wouldn’t it be great, therefore, if the lending problem disappeared (or at least got simpler)?
What if we lived in a world where the only real lending needed was for large corporates, mainly long term for big capital investment or short term to oil the wheels of industry? What if small businesses were paid within a couple of days of supplying goods, and in turn could use the money to fund their suppliers so the need for supply chain finance at punitive rates disappeared?
What we need is a shift in the paradigm in which we operate and then maybe there could be a Utopia where all the confusion becomes irrelevant and businesses can coexist in a harmonious way.
The problem today starts with the traditional thinking of your average corporate treasurer and the lack of flexibility in the tools used to manage cash flow across the procure to pay value chain. There has been huge investment in sophisticated tools to manage large corporate contracts where terms and conditions are managed to the tiniest sub-clause and misplacing a comma or parenthesis results in a major problem to the contracting parties.
What has steadfastly been ignored for many years is the long tail of transactions that all large organisations face. It’s generally quoted as the 80/20 rule (like most things in life) with 80 per cent of suppliers accounting for 20 per cent of spend. The relative imbalance is highlighted because the effort expended in managing those 80 per cent of suppliers is huge. Setting them up on the system, getting contracts sorted and managing the paperwork is immense. The paperwork will cause problems because invariably it will be missing the required ‘Level 3’ data and thus VAT reclaimable will disappear (translate this latter issue into ‘higher P&L costs and poorer cash flow’).
When it comes to payment, traditional models are also mired in claggy thinking. The typical treasurer believes holding on to cash, and paying as late as possible, must be good for business. Days outstanding is a target to aim for, and indeed on the surface it provides a measurable target and one we can bonus the accounts payable team for extending (forget how unpopular it might be to the outside world). What happens next is akin to Darwin’s natural selection. The bigger beasts owed money get on the phone (or email system, or both) and bombard the accounts payable team with demands for payment. The smaller businesses do the same. Unfortunately in their business it’s the same people who have to make new sales, build products and generally manage the business so they don’t have as much time or clout to get paid in a reasonable time.
It’s at this point the small business goes after financing from other sources. It’s the same folks who have spent half their time trying to get their debts paid and now they are trying to convince their bank to lend money. What a choice on how to spend your time!
Inevitably there is a path of least resistance and it ends up being via a non-bank lender. The good news is that finance is easier to come by, but the bad news is that the supplier pays for it – big time. Invoice discounting or supply chain finance – it’s expensive, especially when you add the time involved in getting to that time and place.
You can see there is a space in the article for a White Knight riding to the rescue. All it takes is a shift in the paradigm in which we think and react to the problem and introduce a system which operates within the new paradigm.
The EU rules stipulate Government Departments make payments to suppliers within 30 days and there are voluntary codes for FTSE Companies to do the same. Occasionally a name and shame story will appear, but without compelling arguments much of the rhetoric is nothing more than political gain. It makes a good sound bite to a Government short of good news in the run up to an election to encourage the Whitehall mandarins to ensure folks get their cash quicker.
Notwithstanding the way they ended up with the dictat to pay quicker it can make sound business sense to Government Departments and Large Corporates once the end to end value chain is properly analysed and adjustments are made to the way paper flows and the way revenue is allocated.
Let’s work an example through:
The Large Corporate (LC) happens to have the latest procure to pay software from Invapay. Due to the APIs built around the software it was quick and easy (and cheap) to buy and install. The LC then loaded its supplier base onto the Invapay software, assigned credit limits and payment authorisations/protocols (about a days work) and then it was good to go.
Order forms to suppliers are raised, goods are built and despatched, they are received and receipted and the invoices are raised (the purchaser can even self invoice). The first major problem is overcome. A self contained system which allows the paperwork to be virtual (OK you can print it out if needed) and it has all the Level 3 data needed. Vat reclaim maximised, costs minimised.
The next thing that happens is that the LC pays within 3 days. What I haven’t mentioned so far is that the LC has mandated to its suppliers that there will be a cost for being paid within 3 days of X per cent (it’s only X because X will vary according to circumstances). However X per cent will invariably be cheaper than the Y per cent the small business will be paying for its Bank finance and significantly cheaper than the Z per cent it is being charged by its non bank lenders.
The good news doesn’t stop there. Think about all that previously wasted time as the accounts payable department fielded emails and phone calls. It’s all gone. The suppliers are no longer on the phone, they know that payment is guaranteed if the goods are delivered on time and to agreed specification. They are doing what all small business employees want to do which is focus on value added activity like product development and selling. They are very happy!
The good news trickles down even further. In turn these suppliers have the cash to pay their suppliers and the economy moves at an even faster pace. Even the Government benefits as the smaller businesses become more profitable through value added business focus and tax receipts grow.
This is a model that just keeps on giving. The Invapay software allows them to act as a master acquirer and therefore the LC has its own credit lines. Whilst it is paying its suppliers in 3 days it has the option to put the payment on its corporate card and settle over a month later. It is likely the corporate will have numerous credit lines both attached to a card or indeed direct with a lending institution. The Invapay software is agnostic as to line of credit, it gives a clear picture of lines of credit available and can work to the criteria set by the Corporate Treasurer or CFO. They can utilise credit limits in a much more efficient manner. They can even be a profit centre in their own right…
The ‘X per cent’ discount mentioned above comes back to the organisation as income (less Invapay’s costs). Do the math yourself, multiply X per cent by the annual corporate spend and think how well you will be rewarded by the organisation once you have implemented the system and delivered the new found revenue source.
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