Reduce OPEX, and Grow Working Capital Fund

Post financial crisis in 2008, the Business Finance market changed significantly permanently. Credit crisis hit every business. On one side, where big buyers kept on stashing cash, the suppliers kept on suffering due to lack of working capital availability. Today, Banks & NBFCs don’t give working capital to suppliers unless they have sound business with strong buying partners. And buyers do not pay to the suppliers on time EVER unless there is an absolute necessity. As a result, almost a decade after 2008 (of course the problem existed before that as well), we see the followings:

1. 75–80 % suppliers always get paid late from agreed payment date, hence DSO is growing every year after year.
2. $19 Trillion of suppliers payment flow is running late world wide. And arguably much of that from some developed countries e.g. USA, some parts of EU, and majority from developing markets e.g. China, India etc.

Surprisingly, amidst all of those practices between buyers and suppliers, neither of them are benefiting much. Suppliers are not growing because they do not have cash on time. Buyers are not growing their Working Capital because bank short term interest rate is all time low and decreasing. OPEX (Operation Expenditure) is increasing every day due to increasing employee wages, less automation deployment, unproductive communication & collaboration, and policy changes (e.g. GST implementation will significantly increase OPEX on both buyer and supplier side).

However, CFOs of business organizations want two things — 1) Bring down OPEX, 2) Grow working capital and maintain liquidity. The question, although, is how do they do so? We, at DrGrep, happen to believe that technology is the only answer to that. FinTech has already revolutionized the way people do banking and Banks have gone though tremendous amount of technology overhaul in last decade. Now the same will change the Business to Business finance as well. It’s just not financing, it’s about SMART financing — something that helps all the stake holders in positive way.

Without further delay, let’s try to analyze both of the KPIs, discussed above, scientifically and see if technology can really change the game.

OPEX Issue

We found followings that are driving this significantly

• Employee expense
• Unaccounted (maverick) expenses
• Repetitive tasks
• Less collaboration across the board
• Growing business complexities and paper base processes
• Back end legacy ERPs are not so smart

99% of each activity in the organization today has some reference to paper at some point. 1st they create a digital copy, then they print, then they manually enter into ERP or whatever. And this cycle goes on and on.

cycle is like Digital → to Paper → back to Digital.

As a result they end up with more work, un-utilized hours, less track of expenses etc. And all of that end up growing OPEX. All good! But how do they reduce it? Well, check the list below

1. Supplier Self Service- Reduce Supplier Calls / Emails: (30–60mins / invoice) = INR 300–500 / Invoice = 30L / 10,000 Invoices a yr.
2. eInvoicing- Less paper means less data entry time in ERP: (30–60mins / invoice) = INR 300–500 / Invoice = 30L / 10,000 Invoices a yr.
3. AP Automation- Less review time required: (30–60mins / invoice) = INR 300–500 / Invoice = 30L / 10,000 Invoices a yr.
4. Spend Analytics- Reduce lots of maverick expenses as well by keeping better track of expenses that can directly be controlled by Financial Heads of the organizations.

This is almost INR 1 Cr. saving (~ $150USD) for a mid size business organization with INR 500–800 Cr. ($80MN — 130MN) revenue. It can go further if buyers bring more suppliers on board and be innovative in collaborating with them effectively.

Working Capital Issue

We find following trends in order to reserve cash and maintain liquidity

• Buyers don’t pay suppliers on time unless it is absolute necessity
• Not able to access 2/10 NET60 type invoices because often time opportunity window is closed before it arrives
• Less visibility into entire supply chain spending
• Bureaucratic approach as far as supplier finance management is concerned
• Bank interest level is all time low for short term deposits
• AP is always a cost center — no creativity whatsoever to turn that into a revenue center

A business organization with revenue of $100–150MN will pay at least $40–60MN to it’s suppliers every year. If this is kept in Bank as short term deposit, it will produce maximum 2% APR interest = $0.08–0.1MN for the entire fund (on a monthly interest earning basis). Now if buyers simply launch a Early Payment (dynamic discounting) program to pay suppliers early on their outstanding invoices they can get 20–30% APR discount = $0.8–1.0MN (on a monthly discount payment basis). It’s already 10 times more than what they can earn from Banks. This also means, to remain status quo (meaning, making the same amount of saving as obtained from Banks), they now need to deploy only $4–10MN, and rest they can do as they do now.

What this implies is that buyers can be innovative in their Supply Chain Finance management. It’s not just buy from suppliers and pay them. In today’s supply chain it can be way more than that. If a buyer knows more about the new project being undertaken by one of it’s suppliers, they will be in much better position to plan their internal projects, forecasting, budgeting, price negotiation process etc. And each step of the way buyers will have an opportunity to save money.

As we see, by reducing OPEX and gaining from Working Capital, a buying organization can save up to $1.0MN on $40–60MN spending. That’s 1.7–2.5% saving each year. And it comes without compromising their existing technology infrastructure. End result is not just saving, but supplier empowerment, better collaboration, and financial freedom. Buyers can now choose how much they want to save, and can offer suppliers early payment according to that need. It’s a massive opportunity. Suppliers on the other hand are happy as well — they get paid on time or before, get better support from their buyers, and overall grow their business to the next level.

At DrGrep we believe that’s a win-win for both suppliers and buyers. We are working with major buyers to bring their 1000s of supplier base to our platform. As we go along, we would like to bring some more such buyers to our platform and help them save, something they never thought would be possible. Suppliers are key to any buying organizations, and keeping a healthy relationship with them will also ensure better sales by fostering innovation to their product and service building process.