This post is part of The Financial CPO series. For those interested in learning more about how procurement is impacting earning-per-share and return on capital, visit our dedicated website.
CPOs of the future will need to understand the pressures and requirements of the CFOs so that they may refuse them.
According to research by the IACCM, average payment terms was 57 days a few years ago. This has risen to over 60 in a forthcoming study. Is this a procurement-policy or a finance-forced initiative?
The explanation to this can be partly attributed to the continued uncertainty that businesses feel about the tepid recovery. Indeed there is many that believe that the financial crisis persists.
Recently economic figures from the Eurozone suggest that the currency area has escaped recession. The recovery – such as it is – is buttressed by the most slender of numerical margins. In most cases, growth rates cannot be expressed as an integer.
But, as we are increasingly learning, the world economy does not consist of Europe and North America. The behaviour of businesses in the more buoyant and influential Asia Pacific region is markedly different.
We found in our own research that CPOs based both the USA and European states would consider extending payment terms for suppliers experiencing financial difficulty. The number of Australia-based procurement executives holding the same view is considerably less than this. Presumably, the relative robustness of the Australian economy allows buyers to pick and choose between competing suppliers.
So, why are buyers trying to extend payment terms?
This can be partly explained by the growth of finance in managing the supply chain. One Sydney-based CPO that we spoke stated that his CFO was addicted to working capital optimisation “like crack cocaine”. Simply put, the pressure from within the business on buyers to extend payment terms has never been stronger.
As such, the requirement for CPOs to understand the language of the balance street and engage with finance on this level – in short, to become the financial CPO – has never been more important. This is readily apparent within our discussions with those in procurement who aim
Being subject to the pressure of finance, and arguably the expectations of external analysts, does not mean that purchasing professionals should accept the position. In many cases, suppliers can offer greater value and innovative potential when they are paid promptly and on time. In such cases, the broader impact on the business will be greater than five extra ways of working capital.
The case that CPOs need to make, therefore, needs to be couched in the terms and pressures that the CFO understands. Procurement must show that it is sensitive to the business, but it must show that other factors may have an important role to play in profitability.
CPOs need to learn the language of the balance sheet, therefore, so that they can build compelling cases against placing suppliers under more pressure.
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