Clearly in this business economy cash is not only King, it’s pocket Kings with the flop on the way (for you WSOP fans!). To protect their businesses and ensure sufficient cash flow in this tight credit environment, organizations are doing everything they can to hold on to the cash they have and free up even more liquidity by lowering their net working capital.

And of the 3 levers affecting working capital (Inventory, Receivables, Payables), the one that companies have the most immediate control over is Days Payable Outstanding (DPO). As a result, evidence is mounting that more and more companies are trying to increase their DPO by either paying suppliers late vs. their current terms or pushing out net terms with their suppliers.

Unfortunately, as I have noted previously, and as Tim Minihan wrote so passionately about in his blog post last week, paying suppliers late or extending terms right now is adding enormous supply chain disruption risk as suppliers struggle with their own cash flow issues and lack of access to credit.

Buyers understand this, of course. In fact, as Brian Powilitis notes in his comment to Tim’s blog, “a recent roundtable of Board of Audit Committee Directors reveals that, after only company liquidity, supply chain solvency risk is the top concern of Boards of Directors.”

Make no mistake, it is critical for companies of all sizes to reduce their net working capital to ensure sufficient liquidity to run their business. But it is also critical that doing so does not put their supply chain at risk.

According to this WSJ article from 10/31: “If you look at a big company that pays in 45 days instead of 30, that’s a huge amount of cash [to the supplier]. And everyone’s looking for cash flow”

So how does a Buyer increase their liquidity without soaking their suppliers?

This is where 3rd party supply chain financing fits so perfectly, and causes me to wonder why in the world an organization would try to extend their terms to their suppliers without engaging 3rd party financing to lessen the supply chain risk. 3rd party financing:

• Allows suppliers to be paid early while the buyer holds on to their cash
• Helps buyers extend terms by off-setting the term impact with low cost early payment
• Can reduce Buyers’ payment costs
• Costs Buyers NOTHING!!

Given these benefits (and did I mention that it costs buyers nothing?) extending terms or paying late without engaging 3rd party Supply Chain Financing makes no sense at all.

Drew Hofler is the Senior Manager responsible for Ariba’s Financial Solutions suite of products. In addition to extensive experience in banking and financial services, Drew is ACH Accredited and held Series 7 & 63 NASD certifications.