Aligning treasury and procurement can be key to improving working capital management, but that requires skillful change management and relationship building.
As treasury teams face increasing pressure to improve working capital management amid higher interest rates, cash conversion cycles are emerging as a key metric for success. At NeuGroup’s inaugural Working Capital Symposium this fall, attendees highlighted the growing priority of developing strong relationships with procurement to shrink conversion cycles and optimize cash flow—which, as one assistant treasurer aptly put in the meeting, is akin to a “free bond deal.”
- For many corporates, improving working capital includes extending payment terms and ensuring invoices are paid at those terms—not any earlier. This can cause friction with procurement, whose focus often centers on negotiating favorable pricing at the expense of longer terms and maintaining supplier relationships.
- At the meeting, working capital experts from meeting co-sponsor J.P. Morgan, Pooja Shah and Kjel Christensen, shared their insights into the challenges and solutions for bringing treasury and procurement in sync. “Extended terms can be really hard for suppliers to manage given the higher borrowing rates and lack of capital available for medium-to-small sized businesses,” Ms. Shah said.
- Mr. Christensen added: “Procurement does not enjoy doing term extensions. However, this is one lever you can pull to improve your cash conversion cycle.”
- “We basically never talk to clients without touching on working capital,” Ms. Shah said. “Even clients who hadn’t been receptive to working capital discussions in the last few years are coming back to us more proactively. Working capital management is more important now than it may have ever been.”
Breaking silos. Collaboration between treasury and procurement begins with clear visibility and shared tools, members at the symposium agreed. The right technology can break down silos and demonstrate how procurement decisions directly affect treasury’s working capital targets.
- One member described how her company implemented dashboards and simple Excel calculators to provide procurement with real-time data on how their choices influenced cash flow. “It helped highlight where small adjustments could make a big difference,” she said.
- Another member shared their success in deploying Power BI dashboards to track how payment terms with different suppliers impact their overall cash flow and financing costs. “We’re able to quantify what’s driving cash flow and see where terms are helping—or hurting—our business,” she explained. “It’s about transparency—once procurement has access to this data, it’s much easier to understand how their choices impact cash conversion.”
- Beyond technology, members stressed the importance of building relationships. “It’s all about making friends,” one member noted. “Treasury needs to be in the trenches with procurement. We’re not just talking spreadsheets—we’re talking about saving millions of dollars by improving our cash cycle.”
Working capital wake-up call. One treasury senior director at a global retailer illustrated this point with her team’s experience: As the pandemic began, the company successfully hit all-time lows for the cash conversion cycle—essentially, the time it takes to turn inventory and outstanding customer payments into cash.
- But then the company shortened payment terms to help some struggling partners stay afloat by getting cash into their hands sooner. This included granting thousands of exceptions to normal payment schedules. While this provided much-needed relief to suppliers, it effectively lengthened the multinational’s cash conversion cycle.
- A colleague of the member said, “While there’s room for exceptions, at one point you realize something’s gone wrong.”
- Now, the corporate is recalibrating payment terms, collaborating closely with procurement to balance supplier relationships and improve working capital efficiency. The senior director emphasized the importance of this effort by sharing a key stat with procurement: “Each day the cycle is cut down, that equates to $1.4 billion.”
- The shift involved fostering stronger relationships with procurement, which handled renegotiations with suppliers, and granting fewer exceptions. As a result, the cash conversion cycle improved to 5.1 average days in the most recent fiscal year, from 6.5 the year before (see chart below).
Change from the top down. As with any major shift in company strategy, getting buy-in from senior leadership is essential to making the case internally on a more disciplined approach to cash flow management. Without it, one member said his company was unable to gain traction with procurement, despite using tools like dashboards and detailed reporting to explain the benefits of extending payment terms.
- Mr. Christensen shared an example of how he witnessed CFO buy-in change the game for a client company. He told the CFO, who was seeking feedback on potential blind spots, that procurement’s lack of buy-in could prevent the success of working capital initiatives. The following morning, the CFO took decisive action, delivering an ultimatum in a meeting with procurement. As a result, the team hit 98% of its working capital targets, and procurement quickly aligned to the new terms.
Olive branch. Another way to alleviate procurement’s burden is via supply chain finance (SCF), which allows corporates extending payment terms to also extend their low borrowing rate to their suppliers—maintaining healthy supplier relationships in the process.
- “Certain suppliers, especially in the U.S., have operational challenges,” one member explained. “They struggle with longer payment terms.” SCF helps by leveraging a company’s credit to provide liquidity to suppliers, ensuring that they have access to cheaper funding while optimizing the larger enterprise’s working capital. Ms. Shah referred to this as a “win-win” situation, where companies can meet their working capital needs while maintaining supplier stability and suppliers receive access to early payment and low-cost financing.
- One member shared that his company has implemented SCF with nearly 100 suppliers globally. In times of economic stress, enhancing working capital without incurring excessive costs is critical. While SCF provides an effective way to support suppliers, it’s important for companies to evaluate how these programs align with their broader strategic objectives.
