This article is written by Pauline King
The funny thing in the world of indirect is that sometimes the basics get lost. For example, working capital often gets overlooked even though it’s vitally important to a company’s financial health - especially in a crisis moment. The reason it can get overlooked is that working capital is often heavily focused on direct inventory levels and payment terms with the high visibility of end product cost. But what about payment terms for indirect categories? Do we really care?! The answer is, of course, yes. So why are indirect teams not prioritizing it?
The problem is that there are two blockers, one is how working capital is reported and the other is indirect people’s lack of enthusiasm to tackle payment terms.
Let’s talk about reporting first. When payment terms are extended, this improves working capital in a given year, which then has a one-time positive impact on cash flow as well as a P&L impact based on cost of capital. I am a big advocate of sticking to straight P&L numbers however, in the case of working capital, this narrow focus misses results the C-level is interested in.
What opened my eyes to this wider view was a project at a client who were aggressively growing by acquisition. This meant that Dave, the CFO, was focused on working capital, and so it went on the front page of the new procurement dashboard. He had been aware of the impact of inventory reductions, but not of indirect category results. He was surprised to see the total working capital contribution of $5m (on a $900m spend) which included indirect categories for the first time.
However, success creates expectations! Dave’s interest in driving these numbers got even more intense and he gave procurement a challenge to move more quickly on payment terms.
But this led to the second blocker as the team was not convinced there was real opportunity, especially the US team led by John. He was sure they’d already maximized it on the direct side and doing so on indirect was not going to have material impact. However, the pressure from senior management was high, so they got to work. One push was in marketing where they were putting in contract templates for the first time. They took advantage and moved in some cases from paying invoices immediately to 90 days for creative agencies.
The CFO was very pleased with the results overall and in particular the NA team. This had a follow-on effect for John of improving his personal positioning which had suffered some setbacks in previous years. And, it made Dave look good. Everyone was happy.
So, don’t hesitate to go wide in pushing for better payment terms and reporting on the full financial impact. And as a bonus, what an excellent success story - back to my favorite topic of selling success in indirect!
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