Despite various initiatives, not least talk of a tougher enforcement of the Prompt Payment Code, banks are still reluctant to lend to SME businesses. The figures, for them, simply do not stack up. So, with suppliers being squeezed by extended payment terms, and banks giving them the “waiter’s eye” – many businesses are faced with an increasingly difficult working capital crunch. In the past they would have been limited to traditional supply chain financing arrangements such as factoring to take the pressure off and the wolves away. That is, if the banks involved were sure of a lucrative enough incentive for them in the deal, and if the business qualified in the first place...

Invoice financing has been a boom industry in the UK since 2008, but those organisations left with nowhere to go start to look around – and the best of them start to get innovative. And often, that’s where technology comes in. With the growth of collaborative networks, organisations have realised the power that lies within their supply chain. We live in a Facebook, Amazon world – and it’s one where increasingly, activities previously regarded as the preserve of the banks, including lending and supplier validation, are now taking place peer-to-peer – across their networks.

In other cases, organisations are looking to the technology which has sprung up in the last few years in response to both recognition of the value of these networks and, since the start of the economic downturn, of a gap in the market for better access to finance. This combination, together with the growth and application of cloud technology has come at a perfect time for vendors such as Basware, Ariba, Taulia and Tungsten and relative newcommers like CrossFlow Payments in their roll out of solutions aimed at freeing up cash along the supply chain.

With the technology sitting in the cloud, there’s also a level of visibility and accessibility that simply wasn’t available before – leading to tighter compliance and efficiency levels. And if the banks have been slow to respond to the challenges of the networked economy – to be fair to them they may well have had their eye on other things. And the signs are that some banks – the RBS for example, with their new partnership with Taulia - are waking up to the opportunities which lie in front of them, which can only be good news for struggling businesses - many of which are faced with a Hobson's choice between cutting relationships with important, but late paying customers - or accepting crushing terms of up to 200 days…

Hold on to What You've Got

And yet - the fall-back position of many CFOs is often to hold on to the cash that they have. At a time of economic crisis, an entirely logical approach you’d think, but the net result is often counter-productive. Putting a squeeze on suppliers in order to hold onto cash can have a disastrous effect on the relationship as well as causing inter-departmental strains between Finance and Procurement along the way. Worth it perhaps if a financial argument could be made, but compared to some of the alternatives such as dynamic discounting, such a protectionist strategy just doesn’t add up.

In fact, some observers point out that average payment terms haven’t changed much in the last 10 or 15 years. Which means that despite some government backed incentives to the contrary, such as the Prompt Payments Initiative  - if you work in finance and you have responsibility for the cash in your department - it seems that the overriding instinct is to keep it there for as long as possible.

Dynamic Discounting

So what’s the answer? Well, like early settlement capture, dynamic discounting does go some way to providing one. It’s a solution which offers organisations the opportunity to capture discounts from their suppliers on a sliding scale, meaning that even when payment terms slip past the traditional timeframe, discounts (albeit at a lesser rate) can still be taken, enabling organisations to regain integrity with suppliers and better visibility and control of their working capital.  Nevertheless, it’s not a practice which is welcomed by everybody. The Forum of Private Business has accused companies such as Selfridges and Debenhams of engaging in bullying tactics to force their suppliers to accept a hit on their invoice values. And yet, for the most part dynamic discounting has the capacity to be a far better solution for generating cash flow down the supply chain than factoring where finance may or may not be given, and where quite often the terms are punitive.  On top of that, if by engaging in and accepting dynamic discounting organisations stay afloat, and come the end of the month, people get paid – then it’s something which is definitely worth having in the P2P armoury.

Supplier Adoption

Where these types of solution have fallen down in the past has been in supplier adoption, particularly amongst smaller SMEs. However, with the advance in cloud solutions, this is becoming something less of an issue as suppliers are invited to opt in via automatic online enrolment campaigns for example. On top of that, with their extensive reporting capabilities, organisations are able to stay in full control, putting the power back in the hands of the finance teams.

The Revolution has Started

If you add to that the increase in the usage of vendor portals (giving suppliers instant access and visibility to their invoice processing) it’s easy to see that the world of AP automation and workflow practice is starting to change. We are now at the beginning of a quiet revolution in finance and supply chain automation. In fact, by taking control of P2P metrics analysis, Finance Directors with a keen eye to new technology and how it can help drive progress, have a newfound capacity to have a direct impact on both the profitability and ultimately the overall direction of their organisations.