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The brand new fee occasions reporting framework will have an effect on large enterprise

Joe Donnachie, Supply Chain Finance Manager, Octet

The first reporting round according to the new Payment Times Reporting Scheme (PTRS) is due on September 30, 2021. Legislation requires companies in Australia with total annual incomes in excess of $ 100 million to report the payment terms they offer to their suppliers every six months.

The hope is that by increasing the transparency of payment practices, large companies will be motivated to pay their suppliers faster, thereby eliminating cash management practices that unfairly disadvantage smaller Australian suppliers.

However, the chief financial officers (CFOs) of large Australian companies are now faced with a dilemma. You need to strike a balance between managing your organization’s working capital and increasing shareholder value while speeding up supplier payments. Success depends on their ability to improve efficiency across the billing to payment cycle, and many will use supply chain finance as a practical solution to achieve this.

To plan to fail is to plan to fail

The new PTRS program went into effect this January, which means companies have had 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 move forward with delayed supplier payments. Of course, these reports are required every six months so that the payment deadlines can and should be gradually improved.

With we’re 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 companies are required to disclose where they use or offer supply chain finance agreements with small businesses, but there is no indication that the reporting framework aims to reduce its use.

Indeed, leveraging a supply chain finance facility could be a suitable solution for CFOs who need cash to fund payments without putting a heavy drain on their working capital, both in advance of the September 30 deadline and on an ongoing basis. Used correctly, supply chain finance can also lead to improved long-term relationships with suppliers, but getting these conversations right is important.

Solving the CFO’s dilemma

Many financial professionals will think of Greensill when they think about supply chain finance. There have been a number of deeply inappropriate practices by Greensill, but perhaps the most glaring was that the company heavily armed its customers’ suppliers (the buyers) to accept discounts and gave them limited room for maneuver.

In fact, if properly negotiated, discounts can be beneficial for all parties in accelerating cash flow and allowing CFOs to walk the tightest tightrope. All suppliers want to get paid asap, so often happily accepting a discount for an early payment, while securing discounts keeps shareholders happy too. When all of this is handled through a supply chain finance facility, CFOs can offer this solution to suppliers without impacting their own cash flow.

Such agreements can also strengthen your relationships with suppliers, build trust, and improve your brand’s overall reputation. In a volatile environment dictated by Covid, loyal suppliers can offer your company a huge competitive advantage.

How to negotiate a discount for early payment

Discounts must be negotiated with suppliers and not imposed. To do this, the first step is to assess the financial situation of each of your suppliers and determine which suppliers are willing to pay faster with an agreed discount.

Suppliers with a healthy profit margin can, for example, absorb a discount, while suppliers most at risk of liquidity shortages can also welcome this to avoid long payment deadlines. Also, consider the companies that are critical to your supply chain and those with whom you have strong, mutually beneficial relationships. The next step is to generate buy-in from the suppliers you have identified.

Be polite and approach these negotiations openly and kindly. Prepare for these conversations by listing the benefits this type of arrangement can have for everyone involved. Alternatively, you can contact a supply chain finance provider for professional advice on how to start the conversation.

With only a few weeks until the September 30th PTSR reporting deadline, it is important to start discussions with suppliers now if you intend to use a supply chain finance facility to shorten payment deadlines. Because earlier payments to your suppliers are not as costly as the reputational damage that occurs if you do not adhere to inappropriate payment deadlines.

About the Author: Joe Donnachie is Supply Chain Finance Manager at Octet, a company that provides working capital finance and payment solutions.