|RECEIVABLES FINANCING - DECREASE DSO
How DSO can be reduced using Premium Technology's Receivables Financing Solution
One of the major concerns suppliers have is gaining access to affordable financing early in the supply chain. If there is a significant time differential
from when the supplier starts production and when it receives payment for its product, production cost can increase significantly. So a major goal a supplier
has is to lower its DSO. One way Premium Technology's Receivables Financing Solution can
help lower a supplier's DSO is by providing the means for discount financing through an early payment program.
The Supplier does not receive any Receivables Financing and is concerned that payment will
be late. Suppliers must worry if their buyer will try to shift cost to them by delaying payment
(increase buyer's DPO, increase
seller's DSO). If this happens, the Supplier potentially has to find high-cost short-term financing, which will
cause the cost of operations to skyrocket. The supplier will then have to offset the cost by distributing it throughout the supply chain. But in our
example, the Supplier does not seek any financing and eventually the buyer pays on the agreed upon terms and condition payment date. In this scenario, the
supplier has a lengthy DSO and an extended period of time without access to working capital.
In Discount Financing, the supplier will go directly to its bank and ask for receivables financing (pre-export financing). The supplier will leverage
its pro-forma invoices at a discount to the bank (or the bank can charge interest and fees). The financial institution will recoup its money once the buyer
pays on the T&C payment date. Discount financing allows the supplier access to working capital sooner and also lowers its DSO.
The Supplier needs to determine if the cost of financing will be offset by the benefit of earlier access to working capital. Working capital can be very important
because if the supplier is strapped for cash it could have difficulty ordering raw materials, meeting payroll, maintaining facilities, etc. So even though the supplier
is being charged a markup rate by the lender, it is still considerably more cost effective for the supplier to have early access to its working capital. The supplier
will also no longer have to hoard cash or borrow large amounts to hedge against future lean times.
Another example of Receivables Financing is when the supplier goes to its bank after goods are shipped for post-export financing. This type of financing is
less risky to the bank than pre-export financing (scenario #2) because the goods have been made and shipped to buyer. So the supplier should get even
better financing terms from the bank in post-export financing than in pre-export financing. In this example, the supplier still decreases its DSO (compared
to scenario #1) and gains access to working capital sooner.
For buyers, receivables financing is also beneficial because it can strengthen buyer-supplier relationships. In many cases, suppliers are small and are not investment grade,
so they have difficulty finding short term financing that is not at astronomical rates. So Suppliers will consider buyers who can directly (or through a financial
institution) offer receivables financing as much more attractive partners.