There’s one thing guaranteed to keep treasury and finance professionals up at night—cash flow. It’s no wonder, given that 82 percent of businesses fail due to working capital management issues, according to a study by U.S. Bank. Buyers and suppliers have historically viewed themselves on opposite sides of this struggle, with buyers extending payment terms when times get tough, squeezing companies they depend on for materials. If suppliers go too long without payment, they risk losing their business—or being forced to raise prices, reduce offerings, etc. Buyers and their customers ultimately lose.
Take for a moment, Volkswagen's public dispute with suppliers. When the German carmaker started paying its suppliers later, suppliers responded by refusing to deliver car parts. This caused enormous disruption, forcing Volkswagen to halt production of its best-selling models, the Golf and Passat. It’s a drastic measure, but the underlying theme is a common one. Buyers have historically extended payment terms and treated suppliers like a personal line of credit during periods of market volatility—or even as part of their business strategy. This can cripple business and create a ripple effect resulting in fewer supplies and higher prices.
Modern financial technology provides an opportunity for the relationship between buyers and suppliers to evolve from fundamentally competitive to symbiotic. When both parties know what to expect from one another, each can be stronger and more successful.
A new approach to the supply chain
Financial supply chain technology now makes this vision a reality by aligning buyer and supplier interests at scale. The concept is simple—suppliers, not buyers, set the terms for when they will be paid. Buyers who pay early (either through cash on hand or through third-party financers) receive a discount for doing so. In practice, there are a few things required to make this type of arrangement really successful:
- Insight into needs and cycles: Buyers don’t want their suppliers to go out of business. When each party is clearly communicating their needs—the difficult times of the year when working capital optimization is especially important, for example—each party is able to plan accordingly. Of course, for this to work, both parties need clear data around their business cycles to shed insight into the months when predictability of cash flow is particularly important. Smart businesses are using fintech to understand the cyclic nature of their business, so they can be proactive, not reactive, and communicate to partners accordingly.
- Transparent communication: Communication around payment between buyers and suppliers has traditionally been time-consuming and opaque. Today, fintech allows companies unprecedented, real-time insight into the payment statuses. When this kind of transactional communication is automated, finance professionals on both sides of the equation are freed up to do more strategic thinking about the business. The nature of the relationship between buyers and suppliers can fundamentally evolve.
- Joint innovation: Many of the conversations today between buyers and suppliers are tactical. This is a missed opportunity. Buyers and suppliers have unique insights into each other’s businesses. When provided with the opportunity, they can act as valuable resources for one another, sharing feedback that sparks innovative, new products, processes and strategies. Doing so requires a shift in thinking to view the other as a strategic partner. By building connection in this way, buyers and suppliers can truly transform their businesses.
By connecting the world’s buyers and suppliers at scale across a global network, both sides can work together for shared outcomes. Suppliers are able to get paid early and reinvest in their business; buyers pay less overall and are able to extend their working capital. Forming partnerships to free up capital levels the economic playing field. It generates more potential in an upswing, reduces the risk in a downturn and ultimately strengthens the global economy. That is the promise of enterprise fintech in today’s economy—a business paradigm where all players can win.
Cedric Bru is CEO of Taulia, a provider of financial supply chain solutions.