The Argument for Financial-Chain Management

From a systemic perspective, the only winners in this game are the financial intermediaries who price and ration the working capital shortfall in the overall economy.

Total working capital management represents the extension of information logistics beyond the physical supply chain into the financial supply chain. It is the first difficult but vital step toward doing more business with less working capital.

Corporations Must Take the Initiative
The survey report "Electronic Payment Initiatives and the Internet," published in August 2000 by the Association for Financial Professionals, gives three top reasons, from the perspective of corporations, why business-to-business commerce is slow in adopting electronic settlement of transactions. First, electronic payments systems are not integrated with the accounting systems which hold the relevant AR/AP information. Second, integrated payments and remittance information cannot be sent and received. Third, linkages between payment and financing and risk management providers are either cumbersome or nonexistent.

In other words, it is easy to manage current cash positions and make electronic payments through the current treasury management services of banks, which are very good at what they do. These services, however, are not very useful for total working capital and risk management across the full purchase-to-pay cycle.

So, what can be done? The technology is now becoming available to streamline AR/AP processes, link the flow of funds to the flow of transaction data, and — by creating greater visibility to future cash flows — give businesses access to a wide array of financing options.

Corporations must create the kind of financial information logistics connectivity with their trading partners and suppliers that they have been achieving in the physical supply chain. Banks can be and must be valuable partners, but their key strengths are as trust agents, liquidity providers, and settlement executors. They simply do not have a deep understanding of the purchase-to-pay cycle as their corporate customers live it.

Corporations themselves must take the initiative to do the following three things:

• First, implement new Web-based solutions that link accounts payable/accounts receivable systems and payment systems, both within and between firms. The proven techniques for doing this already exists in the financial economy. Wholesale financial markets handle cash settlement using value-dated, pre-reconciled (that is, sum certain/date certain) payment instructions that have been confirmed between the parties after the trade but before the due date. This saves vast amounts of reconciliation and dispute resolution cost, as well as cash liquidity. The same degree of collaboration between buyers and sellers in the real economy is possible at a minuscule fraction of the investments made by the financial economy players by using the Internet.
• Second, apply Internet technology to overlay a data-rich information flow on top of narrow bandwidth EFT flows. Corporate remittance detail is complex; so are invoice disputes and adjustments. The bandwidth, connectivity, and interactive nature of the Internet make it perfect for collaborative commerce. It is far less suitable for high-value payments. The bank EFT system is actually very efficient at what it does, which is moving debits and credits between bank accounts with minimal data. Payment and remittance data can be integrated through efficient information logistics without having to travel together through the same channels.
• Third, leverage connectivity and data availability to improve trade terms, risk management, and financing. Today, sellers are almost always involuntarily bankers for their customers. They, in turn, need to finance their working capital largely on the strength of their current balance sheet and historical cash flow. If trading partners can achieve clarity and transparency about future cash settlements between themselves, they lower credit risk to bankers and other providers of working capital.

The goal toward which corporations should be heading is global working capital optimization. This represents a significant step beyond simply managing working capital more effectively. It really does mean, Do more business with less working capital.

Detailed Action Plans
The key concept is to break out of the zero-sum game between buyer and seller over who bears the burden of working capital by using information logistics to better leverage the financial markets, which are awash with liquidity and capital. But before this third side of the working-capital triangle can be brought into play, information logistics have to be introduced into the financial supply chain in a three-step progression.

These are really more detailed action programs building upon the total working-capital management imperatives outlined above.

• First, undertake pilots with key trading partners to implement interactive Web-based links between accounts payable and accounts receivable systems. Obviously, EDI-enabled partners can do this today, but the Web allows dynamic dispute resolution around the common view of the data. It allows partners to engage in a bid/offer process with an audit trail, so that settlement terms can be agreed, value dated, and even confirmed in advance of settlement. This is a departure from "normal" practice, but normal practice evolved in the absence of tools. Certainty of cash receipt, in terms of amount and timing, is worth a lot to sellers, and buyers who can offer it can extract reciprocal benefits.
• Second, deploy the information from interactive AR/AP connections internally to manage working capital. Even with sophisticated cash management disbursement and collection services, there is a buffer of underinvested cash to be managed down. Clarity around settlement details, in effect pre-reconciliation and confirmation, can improve the forecasting of cash inflows and outflows beyond statistical models. This clarity can be offered selectively to negotiate better trade terms and prices with suppliers.
• Third, work with financial intermediaries to better leverage the capital markets to obtain cheaper working capital and to remove receivables from the balance sheet. Clarity about future cash flows between trading partners impacts the credit risk profile of borrowers, especially borrowers with sales to strong, highly-rated companies. This can change price. Value dated, confirmed payment obligations can easily be turned into electronic bills of exchange or promissory notes by agreement between the counterparties. Such simple credit instruments are far cheaper and easier to finance in the markets than more-complex receivables-backed securitizations.

To drive home this capital markets point, the Internet allows us to "miniaturize" proven wholesale financial market confirmation and settlement technologies and make them available across the real economy.

• « previous
• 1
• 2
• 3
• next »