As one experienced CFO to another, I think we can probably agree that there is an urgent need for progressive finance strategy. Companies are operating in a global business environment of growing complexity. Things have dramatically changed on the outside. In response, there needs to be more innovation from the inside to create growth while continuing to balance opportunity and risk with sound judgement and right timing.
What’s happening globally is that CFOs are finding these powerful internal resources through treasury and technology. One by one, the proverbial lightbulb goes on for CFOs and finance experts, casting much-needed light on how the function of treasury should be used to systemically create a competitive advantage and grow the business.
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Recognizing the need for change
When I first started as a CFO, I focused on effectively managing the cash conversion cycle so that money came in as quickly as possible, while stretching out payables. I also focused on inventory management by working with operations to set targets and objectives. And I measured and reported. The expectation was that reporting off-target performance alone would cause everyone to become more efficient.
What it actually did was prompt us to move down our priority list toward more risky initiatives so we could meet our commitments. If I gave the warning early enough, allowing us to make those moves, I thought I was a hero. We won, we got our bonuses, life was good. A hammer and a nail – that is all I had: pay later and collect sooner.
The enlightenment that changed my outlook
I recently received an in-depth demonstration of a cloud-based treasury management solution called Kyriba. In it, I saw the answer for a progressive finance strategy, and how to get there. The right treasury management technology, and the real-time role it plays in organization-wide analysis and decision-making, underpins a solid business model for the present and the future.
The platform demonstrates how the treasury function has the power to change the business cycle (cash to cash); provide early warning indicators about the performance of the business; and most importantly, drive the structuring of new business deals to minimize the need for hedging, currency movement and other less reliable strategies. Let me share an example with you.
Reverse financing – the Holy Grail in supplier relations
Imagine a scenario in which you are able to stretch out payments to your suppliers, while they actually get their cash sooner. You read that right. You pay later and they get cash sooner. With an enterprise-level treasury management platform – one that has expanded beyond traditional cash management and forecasting functionality to include payments, supply chain finance, fraud detection and more – you can set up an integrated arrangement with a financing institution so that when you approve a payable, your institution partner immediately pays your vendor using your discount rate – but you do not pay the institution for 60 to 90 days, depending on the terms of your agreement.
Essentially, you leverage your good credit and present a less risky deal for the lender in exchange for a discount rate far superior to what your supplier can get if they factor their receivables. Your operating capital improves, your productivity and processes are streamlined, stringent controls are automated, and transactions are secure. Best of all, everybody wins. Reverse financing is achieved through integrated teamwork, leveraging treasury with procurement, operations, legal, etc., and uses a secured interface to your global ERP and banking systems.
Companies that pull this off are leaving their competitors in the dust.
This is but one example of how the role of treasury is fueling and transforming the performance of today’s CFOs and their organizations. Here’s another: Why offer your customers strict payment terms of 2/10/net 30, when you can set them up with a dynamic discount program so that they can still get a sliding scale discount, even if it takes them 15 days to process your payment? Again, this is a fully automated, integrated function of treasury, so there is no additional work for your receivables team.
Begin to see and plan with real-time intelligence
Within the next few years, I believe progressive strategies such as reverse financing and dynamic discounting will be prevalent across the global business arena. There will be late adopters of the enabling treasury management technologies, and I’m hopeful you won’t be one of them.
I will be posting an ongoing series of blogs in 2018 on the value of treasury to your company. Elevating the role of treasury is a tremendous opportunity being seized by CFOs worldwide to implement new business models, create a competitive advantage and address identified risk management objectives.
Michael Dinkins is president and chief executive officer of Dinkins LLC, a financial services firm connecting business owners seeking capital with lenders seeking borrowers. Michael has spent more than 40 years in finance, including a distinguished 17-year career with General Electric and GE Capital, and CFO roles with five different publicly traded and privately held companies. Michael currently serves on the board of directors for Community Health Systems and the National Council on Compensation Insurance. Michael is providing consulting to Kyriba.