The financial crisis of 2008 had ripple effects that we still feel today. Consider that CFOs and treasurers have been rewriting the rules for deploying spare operating cash.
In the “good old days,” when the major world economies were percolating steadily, the standard rule was to pay vendors as late as possible while putting spare cash to work in the overnight money markets. The economics made sense: all things being equal, a treasurer could generate a decent sum of short-term interest earnings, enough, perhaps, to put a visible dent in the cost of finance operations and win a smile from the CFO. For this reason, finance managers measured “top performance” in payables management by tracking the length of time that vendor payments were held back. The key metric was Days Payables Outstanding (DPO). But that metric should no longer dominate decision-making about deploying cash.
With overnight money markets now yielding one-third of one percent on a good day, the math calls for a different game plan. Treasurers will want to look at cycle-time metrics that reflect how quickly an organization can get invoices paid and win discounts for early payments. The economic payback of doing this systematically can be quite hefty.
APQC has been writing extensively on this change in practice. If you haven’t yet seen our best practices report Improving Working Capital Management and Cash Flow Effectiveness, check it out. The case study on General Mills is especially compelling!