Economic crises tend to make businesses re-focus their attention on working capital. Following the 2008 financial crisis for example, McKinsey discovered an increasing number of companies focused their efforts on cash to help weather the storm — and the COVID-19 pandemic has been no exception.
When we start thinking about levers for improving working capital, our attention is naturally drawn to Accounts Payable (A/P) and Accounts Receivable (A/R). They’re the functions closest to cash, and the teams with the greatest ability to bring more cash into the business, fast. (Inventory Management deserves a mention here too of course, but nothing happens quickly in Supply Chain…)
Procurement is often overlooked in conversations about working capital. But in many cases, A/P is simply tackling the symptoms of problems created further up the chain. And once you start digging into the issues that slow payment cycles, many can — in some way — be traced back to the procurement function.
That’s not a mark against procurement’s name either. They’re the first point of contact for suppliers, and they shape the contracts businesses depend on. Their influence over working capital may be indirect, but it’s significant — and the leaders that recognize that could have a huge positive impact on their business.
With 2021 set to be the year where cash takes center stage once more, here’s what you can do as a Procurement professional to help free up working capital — and have a positive impact on your organization.
Procurement plays a pivotal role in the onboarding of new suppliers, the negotiation of new contracts, and the definition of payment terms — all of which can impact working capital down the line.
Take payment terms for example. Driving the best payment and contract terms, and ensuring that every transaction uses the best agreed terms available needs to be a priority for procurement — and it will help immensely with your Days Payable Outstanding.
By ensuring this is a priority from the first point of contact, you can make sure you set the right precedent with suppliers, and aren’t relying on Accounts Payable to catch payment term discrepancies downstream.
Errors in purchase orders — whether it’s price or quantity changes, incorrect payment terms or simply the wrong supplier information — are always going to have an impact on payment. The wrong payment terms may lead you to pay early — which is good for your supplier, but not so much for your working capital. But other issues, like non-PO invoices or debates over the right price may lead you to pay late — which can also strain your supplier relationships.
Situations like that happen every day — but that doesn’t mean they need to be an accepted part of Procurement operations. By working to improve the number of ‘right first time’ POs, you can strengthen relationships with key suppliers, while also positively impacting working capital.
Key to achieving that is accurate supplier master data, making sure it’s always up-to-date, preferably automatically. This is the elephant in the room — errors abound, fixing them is extremely manual, and everyone hates it. But while you will always have changes as situations evolve, keeping up-to-date master data will have a huge pay-off on how much you have to rework POs and invoices, and how much explaining you have to do to both your suppliers and your leadership team.
Automation can be a significant help here — because once your master data is correct, software that can identify payment term leakage or contract leakage can easily double-check and adjust to the right payment terms or apply the right contracts without any human intervention.
You’d be surprised how many organizations don’t check and renegotiate their contracts regularly. This is for perfectly natural reasons — people are busy, they don’t want to jeopardize relationships, things are in flux — but not doing so could be having a negative impact on your working capital too.
Say you didn’t set up great payment terms with your supplier upfront, maybe because of the competitive situation of your RFP. Fast forward to a year later — you have an opportunity to review and renegotiate, ideally armed with data on supplier performance.
You should be reviewing your contracts and renegotiating at least once a year if not more regularly, and with the right information, you can leverage previous supplier performance to barter for better terms for your organization — not just a better price but better payment terms, too.
To do this, you need to accurately track supplier performance — you need to have data that the supplier can’t dispute, and you’ll want it at your fingertips to run an effective negotiation.
With organizations placing a renewed focus on improving working capital this year, Procurement has a unique opportunity to be one of the driving forces making it happen. But without the right data — automatically processed and intelligently applied by machine-learning algorithms in a way that removes time-consuming, manual labor — focusing your efforts on working capital can be a tall order.
At Celonis, we help Procurement teams free up cash by identifying inefficiencies, such as payment term discrepancies or inaccurate master data, and use intelligent automation to work across silos — helping to eliminate downstream issues that are getting in the way of working capital.
To find out how we can help you connect the dots in your processes and free up significant working capital, download The Little Book of EMS Use Cases: Procure-to-Pay.