Adapting Payments and Inventory to Protect Cash

By altering the management of payment runs, a company can ease pressure on the timing of cash flow. Organizations that run payments daily or weekly should move to a weekly or bi-weekly schedule. This is an effective way to quickly slow down the outflow of cash in a measured and controlled manner. To ease pressure on cash flow, you should also consider which invoices are paid when payment runs are created. A common practice is to include everything due plus invoices due by the next payment run (i.e., pull-forward payments). Instead, pay only what is already due, being transparent with suppliers about the change. Another change that can be made is in how an organization manages cash constraints. Organizations that are highly cash-constrained may be unable to pay all suppliers. In this case, conscious decisions need to be made about which suppliers to pay. Both finance and procurement should be involved in this assessment. For more information, be sure to download the complete whitepaper from The Hackett Group.

The answer to this question will tell procurement whether the company's supplier payment terms are aligned to market norms. For a rough guide, look at the days sales outstanding (DSO) of current suppliers, i.e., the average number of days it takes a company to obtain payment from customers. Payment terms are driven by what the company purchases (i.e., spend categories) and the location of suppliers. Generally, commodity purchases tend to be on shorter payment terms of 15-30 days, extending to 75 days or more for professional services. Payment terms also vary by geography: Local practices and laws influence the length of the credit period offered by suppliers. Consider both the spend category and geography when assessing whether the company's payment terms are appropriate.

One example of a situation when it’s important to consider the cash needs of specific suppliers before making sweeping changes is the following: specialist temporary labor suppliers often have tight margins and can run into difficulties paying their employees if there are sudden changes in payments from key customers. It is also important to understand how specific suppliers are being impacted by the rapidly changing business environment. It is advisable to work collaboratively with suppliers to make sure they too have the cash flow required to maintain their operations. If not already in use, consider introducing supply chain finance offerings, including payment-term discounting, to inject liquidity into the supply chain.