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Commerce · III.08 · MMXXVI · daylight

La Bourse  /  Volume III  /  Nº III.08  /  Workbook — the executive

WORKBOOK — THE CORPORATE EXECUTIVE

Chapter III.08 · Velocity, Circulation, and Health

For the person who owns a P&L, writes board papers, and has to get a number past a finance function that has heard everything. Nothing in this workbook requires new capital, a consultant, or a change of strategy. It requires the purchase ledger you already have and about six weeks.

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THE PREMISE, STATED COMMERCIALLY

Two propositions, and the second one funds the first.

One. Your procurement spend has a geography, and you do not currently know what it is. That is not a moral gap; it is an unexamined variable with a measurable effect on the health of your supplier base, your resilience to a regional shock, your standing with every public-sector customer running a social value weighting, and — in most tender scoring frameworks now in use — your score on a criterion you are currently answering with adjectives.

Two. Your smallest suppliers are financing you at their cost of capital, which is materially higher than yours. The difference between those two costs of capital is a spread that currently benefits nobody. An early-payment facility converts it into a shared gain, and you can attach to it, at no cost, the single most expensive piece of data in the first proposition.

The commercial case is the second one. The first one comes free with it. That ordering matters, because a board paper that leads with community wealth gets a hearing and a board paper that leads with a 3.50-point spread gets a decision.

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PART ONE — DISCOVERY

Weeks 1–3: the number you already own

Exercise 1.1 — Round one, from the purchase ledger (one day of analyst time)

Your purchase ledger holds a counterparty and a registered address for every payment you made last year. That is a complete, retrospective, free measurement of round-one retention. It requires nobody's cooperation and no survey.

Before you run it, write the boundary and hand it to somebody who will hold you to it:

Write the rule before you see the answer. A rule written afterwards is not a rule.

Then compute r₁ = spend inside the boundary ÷ total third-party spend, and state your coverage — what proportion of total spend you classified, and what you could not.

Exercise 1.2 — The multiplier, with its honesty label (1 hour)

Apply LM3 = 1 + r + r². For a business with £12,000,000 of annual third-party spend:

Round two alone moves from £2,640,000 to £5,400,000. Put both lines in the paper. The second is measured arithmetic on a measured rate; the first is a model, and you will say so.

Exercise 1.3 — Rank your suppliers by cost of capital, not by size (half a day)

This is the exercise that produces the money. Take your supplier list and estimate each counterparty's cost of working capital — filed accounts, invoice finance usage, payment behaviour, sector. You are looking for the suppliers whose funding is dearest, not the ones whose invoices are largest. They are almost never the same list, and this is the single most common reason supplier-finance programmes produce no value.

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PART TWO — THE ARITHMETIC

Weeks 4–6: the spread, priced

Exercise 2.1 — One supplier, fully worked (2 hours)

Take a representative supplier billing £2,000,000 a year on 60-day terms.

  receivable at 60 days   2,000,000 × 60/365   =   £328,767
  receivable at 10 days   2,000,000 × 10/365   =    £54,795
  working capital released                     =   £273,973
  turns per year                 6.08  →  36.50

Note where the benefit is. It is the £273,973 of released stock. The turns figure is the artefact, and an executive who presents the turns figure as the benefit will be correctly challenged by their own treasurer.

Now price the trade:

  supplier's cost of that capital at 9.0 %          £24,658
  discount you take, 0.9 % of revenue               £18,000
  your funding cost, 50 days at 5.5 %               £15,068
  supplier better off by                             £6,658
  you better off by                                  £2,932
  annualised discount   0.9 × 365/50            =      6.57 %

The annualised rate sits between the two costs of capital, which is why neither party is being squeezed. This is the paragraph that gets the paper approved.

Exercise 2.2 — The decision number (1 hour)

Compute it for your own programme and put it on the front page:

      supplier's cost of funds − your cost of funds − running cost  >  1.5 points

Worked, on £20,000,000 of volume paid fifty days early:

  average balance outstanding    20,000,000 × 50/365   =  £2,739,726
  running cost                                          =     £30,000
  running cost as an annualised rate                    =      1.095 %
  gross spread 9.0 − 5.5                                =       3.50 points
  net spread                                            =      2.405 points

Below roughly one and a half points of gross spread, the administration eats the trade. State that threshold in the paper yourself, before anyone asks. A proposal that names its own kill criterion is treated as a proposal from somebody who has done the work.

Exercise 2.3 — The efficiency guardrail (1 hour)

Compute p* = 1.7104/1.1596 − 1 = 0.4750. Then hold this line in every sourcing discussion: local retention is worth paying for up to a 47.5 percent real-resource penalty and no further, and at a ten percent premium the local route still delivers 1.5549 against 1.1596, so you are nowhere near it.

This guardrail is what protects the programme from itself. Without it, a retention target becomes a licence to buy circulation at any price, and the first time that produces a visibly bad purchase the whole programme is finished.

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PART THREE — DESIGN

Weeks 7–9: the board paper and the accounting

Exercise 3.1 — Settle the accounting before you write anything (one meeting)

Since the IASB's 2023 amendments to IAS 7 and IFRS 7 on supplier finance arrangements, effective for annual periods beginning on or after 1 January 2024, these arrangements carry specific disclosure requirements: terms, carrying amounts, the range of payment due dates, and non-cash changes.

The distinction that decides your treatment:

Decide which you are building, get it in writing from your auditor's contact, and put that sentence in the first memo. This is the trap that has embarrassed several large buyers and it is entirely avoidable.

Exercise 3.2 — The board paper (half a day)

Six sections, in this order, one page each at most.

1. The spread, and the decision number. Gross 3.50, running cost 1.095, net 2.405 points. The threshold of one and a half points, stated by you.
2. The supplier case. £273,973 released per £2,000,000 of revenue; £6,658 a year better off on the worked example.
3. Our case. £2,932 on the same example, scaled to the cohort, plus the resilience argument in one paragraph and no more.
4. The accounting treatment, settled, with the auditor's sentence quoted.
5. The measurement that comes free. The reporting covenant — one line in the terms variation, buying round two of the retention measurement from the counterparties themselves.
6. Retention today and target, with the model-measurement label attached: 0.22 today, 0.45 target, £4,609,200 a year of additional local income over three rounds, rounds two and three modelled.

Exercise 3.3 — The covenant (one hour with legal)

One condition on the early-payment terms, and only one: the supplier reports annually the proportion of their own third-party spend landing inside your published boundary. A report, never a target. It is the cheapest measurement instrument available to you and it arrives as a by-product of a trade that was already profitable.

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PART FOUR — DESTINY AND DELIGHT

Weeks 10–13: make it survive you

Exercise 4.1 — Into the standing pack (one hour)

The retention figure goes into the monthly or quarterly reporting pack with three things attached, always: the boundary, the coverage, and the model-measurement label. Anything reviewed on a standing basis persists; anything reviewed by exception does not.

Exercise 4.2 — One named owner of the definition (one conversation)

Changing the boundary requires the same authority as changing a revenue recognition policy. Write that down and get it agreed while everyone is still pleased with the first number. The quiet redrawing of a boundary is how this measurement dies, and it never looks like dishonesty from the inside.

Exercise 4.3 — Publish it (one decision)

An internal-only retention figure will be optimised. A published one will not. This is the cheapest governance control in the whole programme and it costs a paragraph on a web page.

Exercise 4.4 — Write the convex target (30 minutes)

dL/dr = 1/(1 − r)² runs 1.644 at r = 0.22, 3.306 at 0.45 and 25.000 at 0.80. A flat "five points a year" target treats all points as equal and will stop exactly where the value begins. Write a target that says where the value is.

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WHERE YOUR OWN NUMBERS ALREADY SUPPORT THIS

Four places in the accounts you already produce where the case is made for you.

Your cost of funds, on the face of the treasury report. You know it to the basis point. Your smallest suppliers' cost of funds you can estimate from filed accounts and invoice-finance usage. The difference is the entire economics of the facility, and both halves already exist in documents you sign.

Days payable outstanding, in the working capital report. Every day of DPO above your sector norm is working capital you are holding at somebody else's expense. You do not have to give it all back. You have to sell fifty days of it to the counterparties for whom it is dearest, at a price between the two costs of capital — 6.57 percent on the worked example, against their 9.0 and your 5.5.

Supplier failures and re-tenders, in the procurement report. Cost one. The fully loaded cost of replacing a failed small supplier — re-tender, qualification, ramp, the quality dip — routinely exceeds the entire annual spread available on that supplier's early payment. That comparison is the resilience argument in numbers rather than adjectives, and it is the argument your risk committee is best equipped to receive.

Social value scoring, in the bid file. If you sell to the public sector you are already being scored on local economic impact, and you are almost certainly answering with narrative. A published boundary, a measured r₁ with stated coverage, an LM3 of 1.2684 today against a target of 1.6525, and the honest sentence about which rounds are modelled will outscore any amount of narrative — because the panel has read the narrative four hundred times and has never once been handed a denominator.

THE SENSITIVITY THE BOARD WILL ASK FOR

Bring it before it is requested. Three lines, on the same page as the decision number.

• If our cost of funds rises by a point, the gross spread falls from 3.50 to 2.50 and the net from 2.405 to 1.405 — at the kill threshold. The programme is therefore sized to be stoppable, and the terms variations say so.
• If volume comes in at half of £20,000,000, the average balance halves to £1,369,863 and the £30,000 running cost doubles as a rate to 2.190 percent, taking the net spread to 1.310. Volume is the risk, not price. Say that plainly; it is unusual enough to be believed.
• If retention does not move at all, the facility still pays: the spread is the return, and the retention measurement is a by-product. A proposal that survives the failure of its own secondary objective is a proposal that gets approved.

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THE FAILURE MODES, NAMED

So you can see them coming.

The boundary creeps. The number improves and nothing real has changed. Most common, hardest to see, fully prevented by a named owner and a published rule.

A modelled round is reported as measured. One journalist, ten minutes. Prevented by nine words in every sentence containing the figure.

The facility is offered to the largest suppliers first. It becomes a cash transfer with no spread in it, produces no measurable gain, and is quietly cancelled in year two. Prevented by Exercise 1.3.

Somebody starts reporting velocity. An internal cash-turnover ratio gets onto a slide, the denominator is redefined the following year, and the series becomes unfalsifiable. Report stocks — working capital released, retention rate, days outstanding — and let the rates be derived.

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THE NINETY DAYS ON ONE PAGE

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APPRECIATIVE QUESTIONS FOR YOUR LEADERSHIP TEAM

1. Which supplier relationship here has outlasted every commercial reason for it, and what do we actually get from it that the price does not show?
2. If our retention rate sat beside gross margin in the monthly pack, which decision would change first — and who would welcome that?
3. Which of our suppliers would tell us honestly what our payment terms cost them, and what would it take to earn that conversation?
4. What is the smallest part of this that runs itself out of a system we already operate, and could we begin with only that?