What do Proctor & Gamble, DuPont, Kimberly Clark, Engergizer Holdings and Newell Rubermaid
have in common with oil and gas field producers / operators and their service providers / material suppliers?
Many of America's largest national and multinational firms are still building agressive cash mamagement
practices adopted in the wake of the Great Recession / credit crisis.
What began as a method to preserve cash has become a means of freeing up money to fund expenses, buy
back stock and support dividend payments at a time of lackluster sales growth and shrinking profit margins. Large firms
are now moving their A/P frim 30-45 days up to 100+ days for their vendors; however, they're giving their vendors the opportunity
to be paid at any time after the invoice has been verifiied for a discounted price.
Similarly, oil and gas producers / operators, under pressure to reduce costs and inefficiencies, also try to conserve
cash as a result of significant price reductions on their products. In addition, recent redeterminations on the valuations
for their reserve-based lending base have not only negotiated price concessions, but also are extneding payment terms from
their normal 30-day net to oilfield and gas field service providers.
If this organization were to move the payments of 75% of that spend from 30 to 45 days, while increasing
DPO by only 15, they would see a working capital improvement of approximately $6000,000. Formula: 15/365*(8%)*(250MM*75%) =
-$600,000 (situations will vary).
As the above formula shows, even a slight
change in supplier payment terms can significantly impact a company's working capital performance. Pay terms have created
a ripple effect on service providers / material suppliers, creating deficits that need to be financed for the company to grow
and survive. Your service provider / material suppliers face these challenges often; some will be successful, others
will not be so fortunate.
A form of supply chain financing known
as FACTORING is commonly used when a financing entity interposes itself between a producer / operator
and their service providers / material suppliers and advances on the company's invoices at an accerlerated rate in exchange
for a small discount. This common form of financing accelerates accounts receivables for service providers / material
SOLUTION: Factoring solves many issues including: (1) The
debtor company no longer has to deal with requests for early payments. (2) A significant amount of the invoice value is available to
fund. (3) The supplier in need of working capital can be paid much sooner than normal in exchange for the factors
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