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The first round of reporting under the new Payment Time Reporting Scheme (PTRS) will take place on 30 September 2021. The legislation requires businesses in Australia with total annual revenue of more than $100 million to report every six months the payment terms they offer to suppliers.
It is hoped that by increasing the transparency of payment procedures, large businesses will be motivated to pay suppliers more quickly, eliminating cash management practices that unfairly disadvantage smaller Australian suppliers.
However, chief financial officers (CFOs) of major Australian businesses now face a dilemma. They must strike a balance between managing their organization’s working capital and increasing shareholder value while accelerating payments to suppliers. Success will boil down to their ability to improve efficiency across the invoicing and payment cycle, and many will use supply chain finance as a practical solution to achieving this.
Failure to plan means failure to plan
The new PTRS scheme came into effect in January this year, meaning businesses have several months to plan ahead. However, if you’ve forgotten about these changes, now is the time to assess whether your working capital position is strong enough to cover any late supplier payments. Of course, these reports will be required every six months, so improvement in payment terms can and should happen gradually.
As we are still in the middle of a global pandemic, traditional funding sources may be limited or it may be too late to raise additional funds from your regular facility. Under the new legislation, large businesses must disclose where they use or offer supply chain finance arrangements with small business suppliers, but there is no indication that the reporting framework should limit their use.
In fact, leveraging a supply chain financing tool can be a good solution for CFOs who need cash to fund payments without significantly impacting their working capital, both before the September 30 deadline and on an ongoing basis. Properly deployed supply chain finance can also lead to improved long-term relationships with suppliers, but it’s important to approach these conversations in the right way.
Solving the CFO’s Dilemma
Many finance professionals think of Greensill when they think of supply chain finance. Greensill engaged in a number of deeply inappropriate practices, but perhaps the most egregious was that the company strong-armed its customers’ suppliers (buyers) into accepting early payment discounts and providing limited room for negotiation.
In fact, if negotiated correctly, early payment discounts can be beneficial to accelerate cash flow for all parties and allow CFOs to walk a tightrope for them. All suppliers want to be paid as quickly as possible, so they are often happy to accept a discount for early payment, while securing discounts will also please shareholders. If all of this is implemented through a supply chain finance facility, CFOs can offer this solution to suppliers without affecting their own cash flow.
Such arrangements can also strengthen your relationship with suppliers, build trust and improve your overall brand reputation. In the volatile environment dictated by Covid, loyal suppliers can offer your business a huge competitive advantage.
How to negotiate discounts for early payment
It is essential that early payment discounts are negotiated with suppliers, not forced upon them. The first step in doing this is to evaluate the financial situation of each of your suppliers and determine which ones will be willing to be paid more quickly in exchange for an agreed discount for early payment.
For example, suppliers with a healthy profit margin may be able to absorb the discount, while suppliers most at risk of cash flow constraints may also welcome it as a way to avoid lengthy payment terms. Also consider businesses that are important to your supply chain and businesses with which you have a strong and mutually beneficial relationship. The next step is to generate buy-ins from the suppliers you have identified.
Be polite and approach these negotiations upfront and friendly. Prepare for these conversations by listing the benefits that this type of arrangement can have for all parties involved. Alternatively, you can contact a Supply Chain Finance provider for expert advice on how to start the conversation.
With the September 30 PTSR reporting deadline just weeks away, it’s important to start talking to suppliers now if you intend to use a supply chain finance tool to reduce the time it takes to pay them. After all, early payments to your suppliers won’t be as costly as reputational damage if you refuse to budge on unreasonable payment terms.
About the Author: Joe Donnachie is Supply Chain Finance Manager at Octet, a working capital finance and payment solutions company.
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