That dynamic is most glaringly on display when it comes to payment terms. Buyers seek to stretch out payment to suppliers, and shrink it to customers. Suppliers, meanwhile, become so desperate to get paid on a timely basis that they agree to deep discounts off their invoices.

Making matters worse is the inability of many suppliers to track the details of receivables, including when a bill needs to be paid, and what exactly it’s for.

“The parties have no idea where cash is, and when it’s going to come,” notes Cedric Bru, chief executive officer of Taulia, a provider of systems and services for managing the financial supply chain. He points to the irony of a system that can achieve pinpoint tracking of containers and the physical goods within them, yet fall short when it comes to following the money.

“The flow of physical goods is working pretty well,” says Bru, “but the flow of financial data is the same as it was 30 years ago.” Many transactions are still conducted through paper documents. So much for that common image of funds zipping around the world in the form of bits and bytes.

Payments can take place in an instant. The problem is managing what triggers them. Old technology still controls the manner in which many purchase orders are generated, printed, sent, tracked and paid. Then there’s the onerous process of rectifying errors. Each step requires extensive back-and-forth communication, delaying resolution of even the most standard bills.

Time for the financial supply chain to catch up to its physical counterpart. Present-day technology allows purchase orders and invoices to be sent and received electronically, with the whole process synched to a company’s enterprise resource planning (ERP) system. What’s more, buyers and suppliers can review the status of any outstanding bill.

Armed with that critical information, the supplier can choose how soon it wants to be paid, whether early or upon maturity of the invoice, with the click of a button.

That’s not to suggest that suppliers always have the power to call the shots. Every payment option comes with a price tag or incentive. Buyers, which often hold the upper hand in dealing with smaller suppliers, might demand a discount on a bill that’s paid early. Or they might prefer to hold on to their cash for a longer time.

Many suppliers, especially in today’s uncertain global economy, desperately need the cash but can’t afford to knock too much off the bill in order to get their hands on it quickly. That’s where an intermediary can step in to help. A financial institution – whether a bank or the new crop of non-bank funding entities – can inject additional working capital into the financial supply chains of buyers and suppliers. It can pay the supplier early, then recoup the funds from the buyer under the original payment terms.

The arrangement can have a positive influence on two key metrics: the supplier’s days sales outstanding and the buyer’s days payable outstanding, both of which describe how well the parties are monitoring their financial arrangements. Suppliers get paid more rapidly, while taking advantage of the spread between the buyer’s cost of funding and prevailing interest rates. For their part, buyers have the option of increasing payment terms or capturing discounts from early payment. Bru says the setup leads to a more satisfying relationship overall, allowing the two parties to stop arguing over payment terms.

In the wake of the Great Recession of 2007, a number of banks have exited the supply-chain financing arena, especially with respect to servicing small and medium-sized businesses. (Bru cites reports that the top 20 banks’ share of total assets dedicated to SMBs is currently in the low single digits.) Taking their place are a variety of non-bank financial institutions, including hedge funds, mutual funds and insurance companies. According to Bru, their level of risk is relatively low, given the unlikelihood of a buyer refusing to pay an invoice that was already approved.

Battered by recession, companies have scrambled for ways to increase cash on their balance sheets. They’ve begun stretching out payment terms to suppliers, often to punishingly long spans of time. In some instances, their actions have threatened the very survival of the supply base, at a time when vendors were already going out of business in droves.

Even with their acute need for cash, why would buyers adopt payment policies that weaken valued suppliers? “Buyers move as a herd,” explains Bru. The most powerful players push for favorable treatment from the supplier. Then their competitors demand the same terms.

Inadequate cash on hand hampers suppliers’ ability to hire people, buy raw materials and achieve financial stability, Bru says. “When the SMB sector is healthy, typically the entire economy gets a boost.”

It’s a message that has yet to fully sink in. Bru says many companies have not paid enough attention to the financial side of the house. Global business-to-business spend is valued at around $120tr, triggered by 170 billion invoices, more than half of which are paper documents. As a result, it can still take approximately 30 days for an invoice to be received and fully approved.

Expect the situation for suppliers to grow even direr when interest rates begin to rise. But buyers and suppliers alike can act now, by adopting modern-day practices that can boost the stability of these frequently contentious “collaborators.”

Next: How to optimize working capital.

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