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In this guest post, we ask TD Bank's Caroline Booth to look at the possibilities that present themselves to those willing to invest in developing the payment process, the theme of the forthcoming issue of Procurement Leaders Magazine.
When I was asked to write about payment, I must say that my first reaction was to say no. After all, the payments process for many procurement people, no matter what currency or tool is being used, is seen as the activity that happens after we finish the exciting bit. But when I started to think some more about this, I was forced to acknowledge its importance to the procurement process and to the health of businesses in general.
As we all know, failure to manage cash flow is the number one reason for small companies to go out of business and for larger companies it remains an important metric for overall financial health.
It is why many governments have legislation and guidance on fair payment practices and why organisations will include a metric on the timeliness of their payments in their corporate social responsibility reports. And while it is, quite literally, the tail-end activity in the procurement process, it is something that needs to be factored into our sourcing activities, which are surely at the heart of what we procurement professionals do.
As REL of the Hackett Group recently reported, in its 2014 US Working Capital Survey, "the top 1,000 US companies have more than $1tn excess cash tied up in working capital, which equates to 6% of the nation's gross domestic product" and 'payables' accounted for over a quarter of this. That is a lot of money, regardless of the currency it is being counted or paid in! And to procurement professionals, it should be recognised as both a bottom-line impact for our companies and a point of leverage with our suppliers.
For those of us who work in larger companies, I suspect that working capital management is something that somebody else in the organisation does and that therefore it isn't always on our radar. However – and this is 101-level in negotiation training – just because something isn't important to your company, you cannot assume that it is unimportant to your suppliers. Therefore including early payment terms in your negotiation may deliver significant value to your suppliers and consequently help you achieve a better deal overall.
Of course the corollary to this is that your organisation might want to improve its working capital effectiveness – and one way to do this is to extend your payment terms. Once again, this needs to be factored into your negotiation. Many companies, especially those in North America and Australia, are likely to have supplier diversity programmes. As such they will be proactively making themselves attractive to companies that are owned by veterans, aboriginal people, women, visible minorities and lesbian, gay, bisexual, and transgender people – essentially having a supply base that is more reflective of the customers they serve and the communities in which they work. Delivering on agreed payment terms is key to making such programmes effective. Similarly there is a lot written now about making yourself attractive to your suppliers – and an easy way to start this process is by delivering on your promises, including payment terms.
This takes us into another consideration – the payment mechanisms and tools themselves. After all, you can forget about offering bespoke or alternate payment terms if you haven't got the right processes and systems to deliver on your promises. The good news is obviously that there are many solutions out there. These run the full gamut, from end-to-end automated processes with little need for human intervention, to fully manual and paper-based systems that can still deliver effectively when set up appropriately. And then of course there are the procurement cards, used to simplify not only the payment activities, but also the procurement process for low value, simple goods and services.
All this, of course, makes me come full circle – recognising the value of payment terms and activities in the procurement process is actually core to good procurement and deserves more attention than it sometimes receives. After all, as one of my old bosses used to say when I came up with some great new idea for sourcing: Okay, but don't forget the knitting!
Caroline Booth is SVP & CPO, TD Bank Group.
This article appears in Issue 52 of Procurement Leaders Magazine, published 3rd Sept. To find out more about the magazine, click here.