CONTRIBUTED ARTICLE: JPMORGAN CHASE

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Jonathan Heuser is Vice President of Trade Services at JPMorgan Chase.

Solely focusing on traditional approaches to cash management can limit a treasurer’s ability to manage working capital in a holistic way. One of the keys to effectively managing working capital is to apply a strategic approach to all operational areas of a business. In other words, treasurers can better manage working capital by looking into functions beyond finance.


The supply chain is one place that treasurers can look to gain more visibility into operational working capital. Understanding a company’s supply chain processes, and how decisions within the supply chain are made, can give treasurers the information they need to profoundly affect working capital.

Specific functional areas to consider include procurement, transportation, and compliance and risk management. Who better than a treasurer to help other departments within a company understand the financial impact of what may initially appear to be nonfinancial decisions? The end result could be impressive gains on the balance sheet.

Procurement
Procurement should be an area of great interest for treasurers. When selecting a vendor, organizations should ideally include trade regimes, payment terms and overall financial footing, in addition to capability, location and price.

Decisions about which supplier to use, and how and when to pay that supplier, are typically made within the procurement department. This often begins with a broad-stroke analysis that focuses on comparable product offerings and the ability to deliver. Negotiations are often focused on securing the lowest possible cost for goods or services, but may not take into account the impact of payment terms and methods on the ultimate cost of goods. Unfavorable terms could have a ripple effect on the supplier, as well as the buyer and its cash flow. Factoring in free trade agreements, quotas, duties and taxes, and transportation complexities earlier in the planning process can help to lower costs and manage risks.

Once payment terms are finalized, systematizing, streamlining and automating the payment process should be explored through joint planning between finance and the procurement team. Including suppliers in the discussion of their preferred payment methods, and establishing a process they can rely on, can help reduce costs and improve supplier relationships.

Direct knowledge of sourcing strategies, payment terms, seasonal variations, transportation and inventory will allow treasurers to plan cash requirements with greater precision and take advantage of investment opportunities.

Supply Chain Financing
Treasurers should also understand an organization’s cost of capital versus the supplier’s cost of capital. Open account terms, for example, may bear lower fees than a letter-of-credit-based transaction, but they can also restrict a seller’s access to working capital financing and increase its costs of working capital. The costs the supplier bears for accepting extended payment terms may be finding their way back into the cost of goods.

In many cases, longer payment terms place a greater financial burden on the seller, while shorter terms place a greater burden on the buyer. Treasurers and procurement staff should determine which party has the lower financing costs and greater access to capital. Payment terms should take this discrepancy into account.

Buyer discounts for early payment may be available or can be negotiated. Often when a company decides to extend payment terms in conjunction with a supply chain financing program, suppliers welcome the option of immediate payment at a discounted rate, especially if that rate is more attractive than the supplier’s typical borrowing cost. Another option is for the buyer to self-finance a program of accelerated payments. This requires supplier invoices to be processed rapidly and thus places a heavy burden on the accounts payable staff, making an automated platform a necessity. A self-financed program also requires an infusion of working capital, so a thoughtful analysis of cash availability and uses is important.

A number of strategic financial considerations should be included as part of the decision-making process. For buyers, is there a better use of balance sheet cash? And for sellers, is it more important to convert receivables to cash quickly? Is a discounted early payment really beneficial to the bottom line?

Currency Concerns
For organizations working in a global environment, currency issues can also affect working capital. Transaction fees, volatility of dollar-based invoices versus a domestic currency and fluctuating exchange rates can complicate otherwise well-thought-out plans.

There are many things for companies to consider. For example, which currency is most efficient for your organization and your vendors—the buyer’s currency or the seller’s? Would an international exchange medium such as dollars or euros be more advantageous? How do the payment terms affect each party’s currency risk? What are the currency and tax implications of purchasing through an overseas buying entity? In which currency does your supplier finance its operations, and how do suppliers prefer to be paid?

Other currency factors that can impact working capital are restrictions on currency flows or difficult transaction reporting requirements. Treasurers must also be prepared to have the hedges they need against currency depreciation or appreciation.

Risk Management
Another opportunity for treasurers is in the area of compliance and risk management. Lack of awareness around risk exposure, overlooking regulatory requirements or failure to establish necessary controls and procedures can expose the enterprise to potential fines and penalties.

Another threat to efficient working-capital management is the uncertainty inherent in the supply chain. If the transportation network is unreliable, companies must carry extra inventory to create buffer stock. If the distribution network is inefficient, then inventory is delayed or mishandled, leading to shortages and an inability to replenish stock. If goods are held for inspection due to improper or missing paperwork, then the transaction is disrupted and the ultimate sale is delayed. All of these can result in lost business and hinder cash flow.

Having established processes, automated tools, and professional advisory services can create a more secure and compliant global supply chain, thus minimizing the risk of supply chain delays, penalties, rising expenses or the loss of customers.

Conclusion
Treasurers have the opportunity to bring a greater level of structure and financial discipline to all areas of an organization. As globalization increases, technology advances and the number of suppliers and vendors available to an organization proliferate, the foresight to take a broader view of working capital management can become a competitive advantage.


Jonathan Heuser