What do Proctor & Gamble, DuPont, Kimberly Clark, Energizer Holdings and Newell Rubbermaid
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 aggressive cash management
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 firm 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 verified 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 extending 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 accelerated rate in exchange for a small discount. This common
form of financing accelerates accounts receivables for service providers/material suppliers.
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 fee.
Read More Articles:
