Cash Management

The Argument for Financial-Chain Management

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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.

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The U.S. security markets turn over the equivalent of the entire GDP every week. Markets settle using about $1 in cash balances for every $250 value exchanged, most of that in free daylight credit. The real economy turns over the $9.2 trillion in GDP on about $1.6 trillion in net working capital, a leverage ratio of less than six. These are very different markets, but the scope for systemic improvement is nonetheless compelling.

There are only two levers for global working capital optimization:

• First, speed it up. Optimize throughput using information logistics. For example, aggregate figures for the economy suggest an average DSO of about 57 days. Elimination of printing, mailing, and re-keying times should be able to knock DSOs down by 10 percent if invoice data was online. Process savings from dispute resolution, fewer processing errors, and pre-reconciliation are incremental benefits on top of the time value of money from speeding up the cycle.
• Second, get it off your balance sheet. Firms are increasingly selective about the uses to which they put their balance sheets. They want to get out of the business of financing other peoples' working capital.

However, the current receivables securitization technology was really built for funding mortgages and other long-term cash flow loans. It is too cumbersome and expensive for short-term capital loans. If corporations can use information logistics to create greater clarity around settlement and trading relationships, it will be up to buyers to grant that degree of certainty, and the ability to make it visible to finance providers, to their suppliers. This will be a valuable quid pro quo to negotiate better trade terms.

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