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WORKBOOK — THE CORPORATE EXECUTIVE

Chapter III.04 · Credit as a Commons

For the person with a P&L, a signature limit, a board and a quarter. This workbook uses the language of the firm without apology, because your own working capital schedule already contains most of the argument — it has simply never been arranged as a graph.

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THE PREMISE, STATED COMMERCIALLY

You are being asked to do one thing: stop financing obligations that cancel.

Your firm borrows to pay suppliers. Those suppliers borrow to pay theirs. Some non-trivial share of that chain loops back to you, which means a portion of your working capital facility exists to move money around a circle that could have been closed with a journal entry. Nobody has ever measured it at your firm, because nobody has ever drawn the graph.

This is not a values proposition. It is a treasury observation with a financing consequence, and it has three lines on your accounts:

1. Trade payables — credit your suppliers have extended you, unpriced.
2. Trade receivables — credit you have extended, unpriced, and provisioned for.
3. The revolving facility — priced, committed, covenanted, and partly financing the gap between the first two.

Multilateral netting reduces the third by finding the loops in the first two. The share it can reduce is measurable in a fortnight from invoice data you already hold, and the measurement costs a single analyst's week.

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PART ONE — DISCOVERY

Days 1–30

Exercise 1.1 — The obligation graph of your own supply chain (one week, with your financial controller)

Do not commission a study. Pull the data you have.

1. Export the top 140 counterparties by value from your purchase ledger and the top counterparties from your sales ledger.
2. Look for names that appear on both. Every one is a bilateral loop and the easiest win available to you. Most firms find between three and a dozen, and most have never netted them.
3. Now the harder step: take your twenty largest suppliers and ask each for their own top twenty suppliers. Frame it as a supply chain resilience exercise, which is exactly what it is. Roughly half will answer.
4. Draw the graph. Look for cycles of length three, four and five.

Output: one page showing gross obligations in the mapped population, and the loops you found.

Exercise 1.2 — Where you already behave like a commons (one session)

Five places, and your controller can find all five in an afternoon:

Each of these is a credit commons your firm is already inside, governed by nothing written down. The last row is the most important and the most ignored: a clearing circle almost always starts inside an institution that already exists.

Exercise 1.3 — The appreciative board conversation (one session)

Before you propose anything, change one question in one meeting.

Replace "where is our working capital tied up?" with:

"Where have we and our suppliers got each other through a tight quarter without a bank being involved — and what made that possible?"

Record what comes back. You are establishing that the firm already knows how to do this, which is a materially easier argument than the claim that it must learn.

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PART TWO — THE ARITHMETIC

Days 31–45

Exercise 2.1 — Compute netting efficiency on real data (one week)

Take the mapped population from Exercise 1.1 and run the arithmetic exactly as the chapter does.

1. Gross obligations. Sum every arrow.
2. Net positions. For each party, receivables less payables. Check they sum to zero. If they do not, your data is incomplete, and that is the finding.
3. Cash required. The sum of the positive positions.
4. Netting efficiency. 1 − cash required / gross.

The chapter's constructed circle of eight shows €339,000 of gross obligations settling on €29,500 of cash — 91.30 percent, each euro of settlement clearing 11.49 of trade. Do not expect that. It was built to contain loops. Slovenia's national monthly set-off clears 10.0 to 15.0 percent on a real economy, and that is the honest benchmark for a first pass.

Exercise 2.2 — Size the prize for your unit alone (half a day)

Work it the way the chapter does, on your own numbers. The chapter's worked business unit:

Read the last line carefully, because it is the one that protects you. On its own, this business unit does not justify a clearing circle. It takes 4.56 firms of that size to fund one. That is not a reason to stop; it is the entire argument for joining a circle rather than building one, and it is the sentence that will keep your proposal credible in front of a sceptical CFO who has seen three platforms pitched this year.

Exercise 2.3 — The sensitivity that survives the room (2 hours)

Two assumptions carry everything: the in-cluster share and the achieved netting efficiency. Move each 30 percent against you and publish all three cases.

Then compute the figure that belongs on the front page of the board paper:

  breakeven netting efficiency  =  annual cost / (gross cleared × borrowing rate)

Worked, from the chapter: 96,000 / (4,400,000 × 9.0%) = 96,000 / 396,000 = 24.24 percent. Below that line the circle is a subsidy with a ledger attached. Above it, it funds itself out of interest the members no longer owe anyone. The circle in the chapter achieves 38.0 percent, a margin of 13.76 points.

An analysis that only works at the central case will be destroyed by the first person who wants it destroyed. One that carries its breakeven unprompted is very hard to attack, and the executive who brings it is trusted with larger questions afterwards.

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PART THREE — DESIGN

Days 46–60: the instrument and the balance sheet

Exercise 3.1 — The balance-sheet treatment, agreed in writing (two weeks)

This is the exercise that separates a real programme from a pilot that dies in year four. Get four things in writing before the first trade:

1. The unit is not a liability of the operator. It is a bilateral trade obligation between members that the operator nets. Members carry balances as trade receivables and trade payables at par.
2. Revenue recognition is unchanged. A sale settled in circle units is a sale on the transaction date at par in the functional currency.
3. Tax is payable at par, in national currency, on the transaction date. Exactly as a cash sale. Say this out loud to your tax director early; the schemes that fail spend their fourth year arguing it.
4. Impairment. Treat a member's debit balance as you treat any trade receivable, with the circle's reserve disclosed as the credit enhancement it is.

Get your auditor's letter. It is the cheapest credibility in the whole programme.

Exercise 3.2 — Write the debit line policy (half a day)

  max debit  =  3.0 × trailing three-month in-network sales

Recomputed monthly, published to the member, with a hard cap for new members. The chapter's tannery breaches it: a €21,000 debit against €4,083.33 of monthly in-network receipts is a coverage ratio of 5.14 months against a 3.0 month cap — a limit of €12,250.00, so €8,750.00 over, by 71.4 percent.

Then write the four graduated sanctions, in order: warning, frozen line, suspension, expulsion. A policy with one sanction has none, and a policy whose only sanction is expulsion will never be used.

Exercise 3.3 — The reserve, and the conversation with your CFO (2 hours)

Here is the argument that will decide whether your CFO takes this seriously, and it is the chapter's central cut. In a mutual ledger the balances sum to zero, so the outstanding credits equal the outstanding debits exactly. The positive holders are the depositors, the negative holders are the borrowers, and between them sits an institution with no capital at all.

Then the repair, which is small: a 1.0 percent levy on €4,400,000 of in-network turnover raises €44,000 a year — a 6.88 percent reserve against the debits, clearing the Basel leverage floor equivalent in 0.44 years and a 13.0 percent CET1-equivalent in 1.89 years.

Bring your CFO this table before they find it themselves. An executive who has already priced the downside of their own proposal is in a different category from one who has not, and the table converts the meeting from a debate about enthusiasm into a discussion about a reserve ratio, which is a discussion your CFO enjoys.

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PART FOUR — DESTINY AND DELIGHT

Days 61–90

Exercise 4.1 — Buy the density (ongoing, and this is the product)

Netting efficiency is a property of the graph. So the only real operating lever is introductions.

Sardex — 3,200 member firms and €43,000,000 of transaction volume in 2018, €13,437.50 per member — employs brokers who telephone members and introduce them to each other. That cost is not overhead. It is the product, because it raises the efficiency, and the efficiency is what pays for the circle.

Budget it explicitly as a line. A circle that treats matchmaking as marketing will watch its efficiency decay toward the national average and its members toward the exit.

Exercise 4.2 — Put one number in the standing pack (this quarter)

Anything reviewed monthly persists; anything reviewed by exception does not. Put netting efficiency and the reserve ratio on the operating pack. Once a number is in the standing pack, removing it requires somebody to explain why — and that is a conversation nobody wants to have.

Exercise 4.3 — Name the failure modes in the board paper (one page)

Do not wait to be asked. Write them yourself:

• Debit lines outrun in-network sales. Coverage ratios breach quietly across many members at once rather than dramatically in one. The monitoring answer is a published distribution, not a mean.
• The anchor member leaves. Efficiency falls faster than membership does, because the graph's density was resting on them. Name your anchor in the paper and say what you would do.
• The circle starts lending rather than clearing. The moment a debit is extended for something other than a trade inside the circle, the balance has no route home.
• The levy gets waived to win members. This converts a funded loss absorber into a conversation. It is the single most common way a circle dies.
• The brokerage stops and the circle becomes a directory.

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THE FAILURE MODES, PRICED

So the board sees you have already costed them

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BOARD PAPER TEMPLATE

One page. Six parts. In this order.

1. The finding. We mapped €X of obligations across N counterparties. The netting efficiency of that population is Y percent. One sentence, with the population named.
2. The prize. Cash released, interest saved at our marginal borrowing rate, against the annual cost of participation.
3. The breakeven. The netting efficiency below which this does not pay, and our margin over it. Put this on the front page; it is the number a sceptic will look for and will respect you for volunteering.
4. The capital position. The leverage identity, the levy, the reserve ratio and the time to the Basel-equivalent floor. Priced before anyone asks.
5. The treatment. The auditor's letter, in one line, with the letter attached.
6. The ask. Join an existing circle, or fund a mapping exercise. Never build a platform — at 0.22× on one business unit's own numbers, building is the proposal that gets refused, and joining is the one that gets signed.

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APPRECIATIVE QUESTIONS FOR YOUR LEADERSHIP TEAM

1. When have we and a supplier got each other through a tight quarter without a bank — and what made that possible?
2. Which counterparties appear on both our purchase and our sales ledger, and how long have we been paying each other in full in both directions?
3. If we published one number about the credit we extend to our supply chain, which number would we be proud to publish?
4. What would it take for our trade association to hold a reserve on behalf of its members — and what would we want it to be allowed to do?
5. Which supplier is our resilience actually resting on, and what would we want in place before they ever left?
6. What is the first sign we would see that our own receivables have stopped clearing through trade, and who would notice it first?