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It should come as no surprise to anyone in treasury or finance that most companies are facing pressure to optimize their working capital management. One of the many ramifications of the recent financial crisis is a heightened awareness of liquidity risk across the board. Some businesses are focused on growing their cash reserves, whether in anticipation of future increases in interest rates or out of concern that credit may not be available to them, at any cost, down the road. Other organizations are spending cash on paying dividends to shareholders or reinvesting in the business. Either way, most companies are much more vigilant today about optimizing use of their working capital than they were a decade ago.

Some companies have responded to this post-recession reality by squeezing their suppliers and pushing out their payment terms. Although this strategy benefits working capital management at the customer company (the buyer), it obviously has the opposite effect on the seller, resulting in unintended ripple effects on the buyer/supplier relationship. Delayed payments put pressure on cash flow, making it difficult for suppliers to pay their bills, make payroll, or fund expansion. They might also need to incur borrowing costs while waiting to be paid. Since delayed payments can reduce the financial stability of the supplier organization, they can also add risk to the supply chain and may eventually constrict the buyer’s procurement options.

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