It is time to look into your working capital (accounts payable, to be exact) after re-negotiating your debt and deploying cost-cutting aggressively but still in struggle to pass over the slowing-cash issues. You have no choice left unless go into the working capital, and squeeze it. You may have been deploying cost-cutting on the costs associated with inventory and trying to improve days sales outstanding (DSO) as well, which aren’t easy task at all. Still, there is big possibility that you are looking to better those results.
A good area to look for betterment is on the payment side. It is often overlooked because of the relatively low status of accounts payable in finance departments, A/P thus provides an opportunity for process and structural improvements that can enable companies to hold on to their cash longer.
If you’re looking for ways to improve days payable outstanding (DPO), you may want to take the following efforts:
Step-1. Get a Full Support from the Financial Executive
I know, executives do not have enough time to get involve in day-to-day activities or having a look the payable numbers. But, unless you get a full support from the financial executives (CFO or CEO), there isn’t many things you can do for efforts. Why? You asked.
- First, corporate initiatives rarely succeed without top-management buy-in.
- Second, some decisions regarding payable can affect the company’s value and reputation—and execs need to aware of the possibilities.
Step-3. Conduct Payable Benchmarking
In essence you would need to gather data about:
- externals – how fast vendors are being paid by the entire market and on what terms; and
- internals – the kind of job purchasing managers are doing in managing payable.
With a valid accounts payable data and analysis on hand, you can design a creative solution to decide in the effort to delay. To do that you would need to work closely with purchasing, treasury, and payables people in the company. Ideally, each chief or manager of those three areas should in charge in the effort.
The problem at many companies, however, is that while people from all three functions are responsible for the project, it’s not clear who’s ultimately accountable for the effort. When it comes to projects aimed at improving payment terms, though, it’s clear who should be in charge: the chief of the Account payable. He/she is in the best spot to see where things to be done.
Step-3. Build a strong Finance-Purchasing Cooperation
Well, in all cases they should make a good cooperation. But don’t get me wrong, finance and purchasing have sharply different perspectives when it comes to payable. While finance and accounting folks focus on the effects of those purchases on company cash flows, purchasers only decide what they’re going to buy and buy it, rarely take a deep consideration to the financial effects.
For their part, I can understand that purchaser don’t tend to don’t often negotiate for better payment terms, since they rarely be rewarded for getting that. Sensing that, creative vendors sometimes try to drive a wedge between finance and purchasing by trying to convince purchasers that payables terms aren’t all that significant. To get the best arrangement for the effort, the two functions need to work more closely.
Step-4. Craft Different Approaches for Different Vendors
Setting all vendors with the same request for improved payment terms won’t work or even damaging. Instead, you would need to divide vendors into different categories and then tailor company’s approach accordingly.
For instant, you can divide vendors into four groups:
- Unapproachable Vendors – Vendors who have significantly more power compare to you (the company). You can’t bargain with them, means you can’t negotiate for payment terms too.
- Vociferous Vendors – Vendors who may complain vociferously about such requests, they will in the end come to a settlement. Have a live meeting with them and explain your position to ask re-negotiation in payment terms, gracefully.
- Angry Vendors– vendors who may yell and scream about the request, but in the end they’re going to do what you ask them to do. What you need to prepare is to not provide a wide space for them to negotiate.
- Weak Vendors – vendors who have no choice but to continue making business with you (the company), they are in no position to refuse to come to terms. You don’t to set up a meeting with them, what you need to do is sending a nice letter announces the new payment terms in order to keep doing business with your company.
Step-5. Start the bargaining By Measuring Vendors’ Profitability
If you don’t understand their total profitability, you’ll have the illusion that you’ve gotten a total improvement, but you haven’t in fact gotten. So, do not negotiate purchasing terms solely on the basis of price. Be ware of other cost related to the purchasing activities directly or indirectly—such as: delivery costs, vendor discounts, and allowances.
In negotiating longer payment terms, you should have a firm grasp of the effect of the purchase on your company’s adjusted gross margin rather than simply on its gross margin. If your purchasing people lack of such an understanding, vendors are able to manipulate the deal by agreeing to stretch the payment terms but charging too much for doing so. Do not let that happened.