Why the Beginning Matters for Working Capital Optimization

INTRO  0:01   

Welcome to The Treasury Update Podcast presented by Strategic Treasurer, your source for interesting treasury, news, analysis, and insights in your car at the gym, or wherever you decide to tune in. On this episode of the podcast host Craig Jeffery sits down with J. R. Robinson, Vice President of Coupa Pay at Coupa, to discuss why the beginning matters for working capital optimization. They take a comprehensive look into the history of working capital management, the pain points and drivers for suppliers, the next evolution of financing and more. Listen in to this lively conversation. 

 

Craig Jeffery  0:51   

Welcome to The Treasury Update Podcast this is Craig Jeffrey and I am joined by J. R. Robertson, who is the VP of Coupa Pay at Coupa. J. R., very excited to be talking to you about working capital optimization.  

J.R. Robertson  1:04 

Thank you, Craig for having me on the podcast. It’s an honor to speak to such a great community of treasury and finance folks. You know, I think what I’m most excited to bring to the table today, you know, is the 20 plus years of experience in procure to pay networks and ERPs and how the impact to a lot of these networks can drive a lot of value for your treasury audience. Coupa has been rapidly expanding our depth and breadth and influence into the treasury and finance functions. And you know, I’ve had the great opportunity to get to know some really great customers at some of the largest innovative companies in the world. So, hopefully I can add a little bit of wisdom that I’ve learned over these years and we’ll have a great dialogue. 

 

Craig Jeffery  1:59   

Yeah, that sounds good. So yeah, Coupa has Coupa Pay, Treasury, Working Capital Treasury was formerly called Bellin. Now that’s Coupa Treasury. So, you’re looking at the entire liquidity, enterprise liquidity, across the zone but I wanted to jump into I don’t know if you want to call it a working capital history or just some background on working capital. Maybe we should start with there’s a couple definitions of working capital. One is the accounting banking, which is current assets minus current liabilities. And I just want to be clear, we’re not talking about that part today. How would you define this liquidity management view of working capital, J. R.? 

J.R. Robertson  2:42 

Yeah, I think you know, definitely it’s how we can use our day-to-day operations and cash balances, whether that’s, corporate balance sheet or even credit available through strategic bank partners to drive yield and drive value not just for your corporate businesses but also drive liquidity and value to your supply chains. So that’s, I think I’d like to focus on that primarily. 

 

Craig Jeffery  3:17   

The traditional current assets minus current liabilities is that accounting or banking definition, which is really just geared towards, “Do you have adequate liquidity to meet obligations as they come due?” And then the focus on another definition tends to focus on accounts receivable, inventory and accounts payable as an efficiency measure and your focuses on the overall balance sheet, including AR, AP, and inventory, being able to optimize those so little bit of a combination of both. You know, when we think about working capital, making improvements and working capital, sometimes that is solely focused at the end of the process. You know, the idea of, “Oh, we’re going to pay slower” so we’re going to improve our DPO by paying later at least that’s perhaps an immature view of it. So, the view might be just at the end of the process, as opposed to a more comprehensive look. You know, this idea of working capital program improving or being more effective by moving up the chain is a point that I’ve heard you make at different times. Can you can you just give us some background or explanation of that?  

 

J.R. Robertson  4:35 

I think historically, you know, whether it’s a bank providing financing or another FinTech, you know, helping corporates facilitate financing the activity typically happens after an approved invoice is run through an AP process, and then there’s some instruction or some file that’s shared, and it typically is at the very end of that process. And, you know, I believe that there’s so much that happens in the front end of that process, whether it’s identifying suppliers that will accept an early payment or need liquidity, it’s getting the supplier information, right, I mean, that’s a huge challenge for many corporates and banks is just having accurate supplier information. You have the timing of the payment term and the settlement time so that’s another kind of variable that, you know, oftentimes you have to plan and have and oftentimes have challenges around. So, you know, I think the more you can solve some of this upstream working capital challenge, the easier it’s going to flow, the more suppliers you can get into your program, you know, the more value you’re going to provide to your supply chain. 

 

Craig Jeffery  6:06   

You know, you mentioned the timing in terms and also about this, I don’t know if you want to call it you know, getting the supplier info together. How does getting the supply is supplier getting the supplier info together, solely about I don’t think that’s what’s gonna say it’s solely about efficiency? But are you indicating that there’s some feedback loop on to the financial side of working capital optimization by by doing that and the front end. 

 

J.R. Robertson  6:35 

The more you know about the supplier, whether that’s, you know, how much spend you’re doing with that supplier, understanding some of the liquidity needs of that supplier, you know, the size, credit rating, whatever, you know, understanding the supplier better and better is going to allow you to use all of these different working capital vehicles. You know, where supply chain finance is one you know, you talked about PO and inventory finance, you know, there’s even business credit cards or virtual cards. So, there’s a huge array of different kind of financing vehicles. And I think the better you know your supplier, the better you can prescribe the right financing vehicle for them so that you don’t inundate them with all the options. They’re not confused by the offerings at hand and you can be a little more prescriptive. I think, you know, that kind of falls in the bucket of kind of just user experience or supplier experience, and I think that’s a that’s a key element to knowing your audience and knowing your supply base and their needs. 

 

Craig Jeffery  7:45   

Maybe you could talk a little bit further about the history of working capital management. What’s going on, and where are we today? 

J.R. Robertson  7:53 

Trade finance has been around, you know, 1000s and 1000s of years. So, you know, we’re, we’re not recreating the wheel here, I think just until kind of the 80s the banks really started getting into how can I help corporates, you know, provide liquidity to not only themselves but also their supply chains. And then, over time, the FinTech’s have gotten involved and made it more efficient and made, you know, supplier onboarding better, you know, created technology that facilitated optionality, both for buyers and suppliers. And that kind of brings us to today and you know, I think at the beginning you talked you asked the question about working capital being at the end of the process, and I think historically, that’s where this has been facilitated. And not until really, you know, four or five years ago when Coupa got involved did we see the true value of all the upstream data, not only that the banks, but our customers and suppliers that we realized, you know, we had a unique position in this kind of embedded finance network, right? There’s been networks. There’s been financing, but they struggled to kind of marry the embedded financing within the business process. And I think that’s where I think the next evolution of financing is going to go and, you know, it’s clear in kind of the interest from many of our bank partners, listening to some of the challenges they have in driving these types of working capital programs that we provide something that a lot of the financing world has not seen before. 

 

Craig Jeffery  9:50   

J.R., thanks for that. I wanted to talk about this, this view of sometimes you see in, you know, in the media or people putting out information could be consultants who say, there’s huge sums of working capital that is trapped. Andthere’scertainly a real sense where that’s the case and then there’s another element where, if we think about it simply as between two trading partners, that it’s a zero sum game, you know, if I pay you later, to improve my payables and how long it’s taking me to pay, you’re receiving money later and so on a net basis between two trading partners there’s no difference there. So how is how is working capital a zero sum game and how does it change or what’s necessary for that, you know, win lose to change to a win-win? 

 

J.R. Robertson  10:45 

Thanks, Craig. Yeah, I absolutely agree that for this to be a net zero benefit or a win-win for these trading partners the bank squarely has to sit in the middle. You know, if I’m giving up DPO and gaining DSO you’re right, like that’s, you’re just trading DSO for DPO. And the banks are really important kind of mediator here because they don’t have the same liquidity crunch. They don’t have the same timelines that a corporate has around their cash balances. And so they really are a strategic partner in making sure that this trade balance works itself out and there’s clearly a benefit for them. But, you know, I think they play a very important role in kind of this working capital optimization. 

 

Craig Jeffery  11:45   

So, if I’m a company making a payment, and I’m cash rich, I would want to I might want to promote or take advantage of every time someone offers me a discount that provides me a better yield. So I don’t necessarily need to bank to take advantage of that. For example, if I’m collecting money, I’m just trying to see if I’m hearing you right, if I’m collecting money, I might want to get paid sooner. Other people may be my customers may be trying to push out terms to 60 or 75, 90, or whatever number it is. So you’re saying the bank can sit in the middle where some companies have excess cash, some are in need of cash or capital through this and they can bridge that timing gap. Someone can pay at 75 days? I can collect at 15 days, right? That’s better for me as a supplier, it’s better for them as a payer and the bank who has access to better capital can take advantage is that a type of example you’re talking about?  

 

J.R. Robertson  12:51 

Yeah, I mean, I think to that point, the cash rich companies have the luxury of being able to keep their own supply chains healthy. Not every company has that ability. And so, the bank’s ability to kind of fill that gap and provide you know, many companies globally, the liquidity that their supply chains need to stay healthy, and then you have a combo of both, right? I might have enough cash to fund you know, 30% of my supply chain, but how do I quickly pivot and use my balance sheet and the bank’s balance sheet in a comprehensive program? And I think that’s one of the challenges that you know, many companies have is they say it’s either all on my balance sheet or not, or all the bank or not, and being able to be flexible and nimble and point the liquidity spicket based on kind of time of the month or seasonality. You get the kind of the best of both worlds but it does take technology to really help facilitate that dynamic kind of change in funding. So, I think that’s definitely what we’re trying to help our customers achieve is, you know, the nimbleness of their own balance sheet but the flexibility and the ability to leverage these bank partners. 

 

Craig Jeffery  14:22   

I like your comment about flexibility, you know, some of the survey data we have shows, I can’t remember the percentages, you know, below 30 or above 30, but it’s somewhere near 30, where those are companies that move from a cash rich position or cash positive net investor to net better through a different times of the year. So that’s a pretty significant portion versus those that always net borrowers are net, net cash rich. So I think that that flexibility speaks to the audience, but it also speaks to the effectiveness of programs people put in place at their companies because not everyone’s taken advantage of paying early or discount discounts at different times. 

 

J.R. Robertson  15:03 

And I would say the suppliers have the same challenge, right? They have different liquidity needs at different times. And, you know, I think many of these programs that exists today they’re kind of a you’re an all-in or you’re an all-out I mean, they would say that will finance you at any point. But the challenge is the way that we onboard suppliers. It’s, you know, we, I think many want the juice to be worth the squeeze, right? And so, you know, they’re, they’re not going to go after a supplier that might or might not want financing every once in a while, and so they kind of fall through the cracks a lot of times, and on top of that you have a supply chain that churns 30% every single year. And so, you know, the ongoing maintenance of these kinds of programs without technology, you know, I think we’re leaving a lot of money on the table. You know, that gets stuck in the supply chain. 

 

Craig Jeffery  16:11   

You know, I want to come back to that question about how broad, let’s say, processes could cover the landscape without tech I mean, without much more integrated tech. But I do want to just ask you some questions on the you know, on the supplier side, for example, what are you seeing as the drivers to work in cab optimization for suppliers, and maybe that’s in response to pain points or it’s in response to opportunities or challenges? How would you describe the supplier situation? 

J.R. Robertson  16:45 

I think you kind of hit on it, you know, that they’re either needing to bridge the gap and short-term kind of liquidity needs. And you know, they might not be able to get more credit from a bank, the equity lines or you know, whatever vehicles they can draw on are just not available and so how do you go and use what is available, and that is your AR and so, I think a lot of it is you know, bridging the gap in key times, and other is being opportunistic of growth, you know, with key buyers right, you got to have enough spend throughput without buyer to make it worth it. But yeah, I think I think we’re seeing both sides of the equation suppliers wanting needing to fill a gap and also wanting to throw some gas on the, on the fire to help grow and keep critical times. 

 

Craig Jeffery  17:43   

Yeah, it depends on the industry, but it certainly seems like a lot of buyers might be larger, have easier access to cash, cheaper access to cash than some of the suppliers. You know, this this can help ease up the supplier challenges in a different way than we’ve traditionally seen. Anything else on the drivers for suppliers? Because I want to move on to end-to-end as soon as we’re clear that. 

 

J.R. Robertson  18:12 

Well, I think it’s worth calling out you know that oftentimes in these programs the suppliers who need the liquidity most aren’t always the ones who get the help, you know, because banks are targeting you know, the large dollar kind of low number of suppliers, what’s the path of least resistance to the largest amount of flow? And I think, those aren’t always the suppliers that need that liquidity the most. And so, when you’re when you’re looking at kind of your corporate working capital strategy, you want to have optionality and flexibility to get those in your supply chain that needed the most. And I think that’s really, really key. 

 

Craig Jeffery  19:00   

When we think about this idea of the cash conversion cycle and looking at things on a comprehensive level, this end to end and instead of just focusing at the end of the process, like we talked about when we started this discussion to starting at the beginning, you had you had described some of those elements right when we started, but maybe you could talk a little bit more about how different organizations are leveraging the end-to end view, like where are they finding opportunities? What’s the reason for the success of these types of programs? 

 

J.R. Robertson  19:39 

You know, I think one of the examples is we have a customer and this is the first time that I had seen organizationally treasury owning, sourcing and contracting. And I thought it was really interesting from a corporate structure standpoint, that treasury would own the front of the process, but it makes absolute sense because what they told me is that everything rolls downhill, and they were tired of picking all of this stuff up at the very end and not having any leverage. And so, what they did is they made sourcing and contracting under treasury, and so they could control the payment terms. They could control many of the supplier onboarding and things that they need at the front end of this process. And I haven’t heard of a lot of companies, you know, corporately structured like this, but when I heard that I said, “That makes a lot of sense”. And that is actually pretty innovative in nature, and I think that story kind of demonstrates why, you know, having visibility for treasury throughout the process, starting at the very beginning, when we’re negotiating payment terms, and you know, what currencies we’re going to transact in and, you know, everything else that kind of goes into onboarding a supplier and developing a supplier relationship. That’s when you have all the leverage anyway, so why would you not want to kind of put those things on the table before you’re actually a supplier to make sure that you know, everything’s buttoned down and all your ducks are aligned, all the way from beginning to end? Because I think that’s what’s going to allow you to have a much more seamless flow of process visibility and control of these types of programs and just general treasury function. 

 

Craig Jeffery  21:44   

That’s really interesting J.R. I haven’t seen I haven’t seen that too often. I have seen this multi-year trend or more regularly where treasury might have additional oversight over payment terms, like you said, supplier onboarding, or the process that’s used there as well as the process for settlement, moving towards more electronic methods. So, I guess, you know, there’s different ways to solve that problem, but it’s yeah, that’s an interesting, interesting example. Why would you give those things up? What is procurement care about oftentimes? Price, they don’t care about terms like get a better price and, you know, we’ll pay instantly. Well, that may not be best. That’s not going to be the best solution for the organization. So that’s a that’s a great example. So that’s an organizational element. What are some of the other tools that you see, perhaps becoming more popular over time? To help solve some of these challenges?  

 

J.R. Robertson  22:43 

Well, definitely I would say better visibility of what’s going into the contracts. What kind of clauses around early payment are you putting in? You know, I think in general, there’s just not a real good repository of that kind of data for treasury to manage at a high level. You know, I would say that really having the embedded finance process integrated into a source the settlement, you know, flow for the corporate I mean, that is really key is a process kind of continuity. You know, I think that you’re clearly supply chain finance, we talked a lot about that virtual card is a great vehicle for, a great lever to pull for treasury organizations. 

 

Craig Jeffery  23:37   

Let’s take a jump on virtual cards, and maybe just give a quick explanation. And why why is that a good lever? 

J.R. Robertson  23:46 

Well, it’s a it’s a good lever, because one, it gets suppliers paid earlier, so they get instant settlements two, especially when it’s a virtual card kind of embedded in your process, now you can reconcile much easier so you have a card with a PO to an invoice and so the reconciliation all sets kind of in in one place. And so, I know a lot of AP teams hate reconciling their credit card statements at the end of the month because they don’t know where all these charges go to. So, the ability to kind of streamline the process and streamline the reconciliation is big for everyone. You get the credit element, right? I get to pay now, my supplier, but I don’t pay the bank, you know, I paid the bank on a term, whether that’s 30, 40, 60 days. So that’s a working capital element. And then, you know, for much of the risk, I mean, the networks and the acquiring banks. They actually take a lot of the KYC on, so you know, if I pay with a card now I don’t have to onboard that supplier into my vendor master, my ERP, I don’t have to give them any tax information because the acquiring banks managing that, so there’s you know, the working capital and you know, operational efficiency kind of all rolled into one when you talk about a virtual card. It’s a great solution. 

 

Craig Jeffery  25:20   

Yeah, so the end-to-end view, the faster settlement for one party, as well as looking at the efficiency, that’s a good explanation of how people are looking at things broadly and the solutions drive benefits in a couple different areas. You know, we talked about, you mentioned churn rate, about churn of suppliers for example, and I want to bring this into the discussion with a question. Was working capital optimization and event or process? And I know it’s sort of saying yeah, it’s a process because there’s a churn rate, but I want you to explain that a little bit more the churn rate. So, is working capital optimization an event or process? Why? And how does the churn rate have an impact on the success of working capital, the success of efficiency? 

 

J.R. Robertson  26:19 

So, I think the answer is both. You know, I think to your comments. You know, many of our customers, they churn their supply chains 30% every single year. And so, every year you have a new crop of suppliers that have, or can have, liquidity needs, and so you know, from a process perspective I think that becomes a bit of a challenge right. Who’s responsible for that? Is it for procurement? Is it AP? Definitely not treasury. They’re not, you know, equipped and staffed for that kind of a workload. And so, your ability as a company to build in a process, especially as part of supplier onboarding that really understand the preferences, and the needs and the profiles of your suppliers is really key. But it’s also an event, because sometimes you have suppliers that only need it once or, the nature of working capital is yield. And so that’s an event to me is giving, you know, some of this, you know, yield as part of the process and the reality is, is it’s so it’s such low risk. I mean, you look at these treasury vehicles or bonds, I mean, they’re so low, you know, from a yield perspective that why would you not redeploy your capital to one, beat the yield of NPO many things out in the market, but it’s already a liability. So, you already owe it. And so, I think, you know, the arguments of not using capital available to you as a corporation to you know, help your supply chain. I don’t think it’s a matter of like, do you have the money or does the money wanted to be deployed? I think it really comes down to I don’t have a good process, and I don’t have a good technology to be able to manage it effectively. And so, you know, you end up putting such a burden operationally on your team that the juice just isn’t worth the squeeze, you know, and it’s not worth it. So, I asked thats what I’m seeing a lot of times across our customer base. 

 

Craig Jeffery  28:41   

Yeah, thanks. Example of customer service 30% churn a year. I think that makes that makes the point even if it’s 20% or 15%. That’s a lot for a month. And without staying up on it’s not it’s not a single event. It’s an ongoing process. Anything else that that has a big impact, whether it’s churn or whether it’s something else, what else are  you seeing that people should be mindful of to optimize their working capital over time? 

 

J.R. Robertson  29:19 

Yeah, I mean, I definitely think the onboarding costs of bringing these suppliers on, I think it’s really important to try to develop processes and to, you know, even for the banks, like that’s one of the most costly positions for them, and so I think everyone’s trying to solve, you know, the supplier onboarding and kind of risk process. And I think that supply chain is a great carrot to be able to drive, you know, better onboarding for you know, corporate and so I think that’s one capacity. You know, that’s one thing. I think the other is really kind of suppliers don’t always want their customers to know that they might need liquidity, right? I mean, if I’m a key strategic supplier to a buyer, you know, I don’t always want my supplier or my buyer to know that I need cash. And so how do you make it indiscreet or even not make it an event, right? I always say “Where there’s smoke, there’s fire,” like as a buyer, I would want to know if my supplier needs liquidity, because it’s not that I would make buying decisions solely on that, but I would understand that, you know, they might not be a supplier of strength and so I think there’s even some kind of byproducts of these programs that can help you make really educated decisions and know your supply chain better. And so, I think, you know, again, it’s all about knowing the supplier. You know, I talk a lot about supply chain health. It’s really supply chain health insurance, right? I mean you’re trying to ensure that your supply chain is healthy because when they’re healthy, your business is healthy. And I think we have a lot of room where there’s a lot of room to grow in corporate, corporate businesses around how can I engage, interact and infuse liquidity to help my suppliers survive, grow and thrive. 

 

Craig Jeffery  31:41   

That’s almost a great closing remark. But I’m gonna ask you just to give you an opportunity at the end, do you have any final thoughts on adding value in cash conversion cycle are in the effort to optimize working capital? 

J.R. Robertson  31:54 

You know, I think more than ever it’s very full frontal, right? We’re seeing a lot of these supply chain bottlenecks. There’s stresses and pressures and the supply chain is really getting stretched beyond its infrastructure capability. And I think that’s why it’s so important for corporates to really be thinking cross functionally, right, procurement, AP finance treasury, as to ways that they can continue to keep their supply chain healthy. I mean, working capitals, you know, working capital programs have the best intentions that are so important to supply chains, but I think that in the B2B world, we are still lagging behind, you know, even some of the consumer digitization. You know, the buy now pay later fad. I think oftentimes we think about, you know, oftentimes I think about you know, 2008 and what would have happened here, if we would have had, you know, a network and an infrastructure that would have been able to infuse capitals rapidly into our economy like these working capital programs. How would that have changed the outcome of some of these, you know, economic downturns? And so that’s what, that’s what I think about. That’s what I think you’re, you know, many of these corporate executives should be thinking about, and there’s a lot available to them. So, we’re excited to partner with some of the world’s largest brands to help solve a lot of these challenges. And, Craig, thank you so much for having me on. It was an absolute blast and thank you to your audience for spending some time with me today. 

 

OUTRO  33:53   

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