Working capital management subsists of boosting free cash flow and net income to grow and address existing debt or distribute shareholder value through dividends and buybacks.
Companies can leverage early payment programs like dynamic discounting and supply chain finance to address a cash surplus or cash deficit to improve working capital management, and reduce the risk of supply chain disruption due to liquidity.
Dynamic Discounting as a Working Capital Solution
With mounting pressure to extend days payable outstanding (DPO) by paying suppliers later, dynamic discounting allows suppliers to be paid early in exchange for a discount or financing fee at a lower cost of funding than they can achieve on their own.
Dynamic discounting programs are best suited for companies with excess cash and liquidity that are looking for an alternative to low-yield, short-term investments in order to earn risk-free returns on cash. In utilizing a dynamic discounting working capital solution, suppliers can improve their own working capital to increase production efficiencies and drive growth.
Supply Chain Finance as a Working Capital Solution
Also known as reverse factoring, supply chain finance (SCF) enables suppliers to extend DPO and is ideal for organizations looking for term extensions on their payables to improve cash flow performance.
Supply Chain Finance for Financial Institutions
Financial institutions in particular can benefit from offering supply chain finance programs to their corporate clientele. Such a program can differentiate a financial institution from the competition and foster better relationships with corporate clients.
Banks will often partner with technology vendors to create white label programs for supply chain finance. Some of the reasons banks choose to partner with vendors is because the SaaS environment eliminates the need for technical hardware and support, they are highly-configurable and can easily adjust to programs (by buyer, funder and jurisdiction requirements), and offer automated processes for loading files, e-notifications, sell offers, purchases, early payments and final settlement.
Choosing the Right Solution
The right solution is critical to the success of working capital management, regardless of if an organization using a supply chain finance or dynamic discounting program.
When evaluating software and vendors to support these programs it is imperative that organizations look for a solution with expert teams, a multi-funder platform, program flexibility, supplier onboarding and a complete workflow — including cash visibility, forecasting, payments and pre-built ERP integration.