Integrating C2FO into a cash management strategy

By Wayne H. Smith, a Senior Adviser to C2FO, former Fortune 500 Treasurer and President of Working Capital Concepts, LLC and the author of Mining The Ca$h Hidden in Your Business; Increase Cash Flow and Decrease Financing Requirements by Reducing Working Capital

Investing cash is a serious, time-consuming and risky business.  As the treasurer of a Fortune 500 company, I followed three very simple but effective investing rules: safety, liquidity and yield—in that order.  Yield came in a distant third. Our mission was to have access to capital, minimize costs and protect assets.  Minimizing costs included minimizing the cost of capital, which we felt added the most value to the company. This old school strategy worked very well for my team. We had little excess cash and the traditional investment vehicles such as money market funds and treasury bills worked very well.

Today many companies have large accumulations of excess cash. As cited in the Wall Street Journal, one thousand of the largest U.S. companies are sitting on a growing pile of cash—some $1 trillion as of last year. This is a 60% increase over the last 5 years.

I recommend segmenting cash into two categories; “operating” and “strategic.” Any cash not required to operate the business on a daily basis should only be held for a strategic purpose. It needs to be managed separately and differently from operating cash. The investing strategy for strategic cash should meet the objectives for having the cash in the first place. For example, if the excess cash is being accumulated for funding acquisitions, the investing time horizon is probably from several months up to one or two years. You want to make sure the cash will be available when needed and not locked in a long-term investment that is under water or cannot be sold at the time the cash is required.

C2FO is a more strategic option available for cash today, increasing gross margin by negotiating market-based discounts for the early payment of approved supplier invoices. Injecting strategic cash in a company’s supply chain and increasing gross margin is an excellent alternative use for excess funds and meets the safety, liquidity and yield objectives for protecting a scarce corporate resource. Utilizing strategic cash in this manner is virtually risk-free, usually very short-term and the yield is significantly above that achieved in traditional cash investments. While money market accounts generally meet the safety and liquidity requirements they are not as safe as we all once thought they were and are yielding well below 1%.

Using C2FO to negotiate a market-based discount for early payment of approved invoices yields an average annual percentage rate (APR) of about 9% for average days paid early (DPE) of 22. The early payment of an invoice with a discount is extremely low risk since you would have to pay the invoice by the due date anyway.

C2FO provides an outstanding opportunity to allocate excess cash to increase gross margin while strengthening a company’s supply chain.