Managing Director

As an example, paying an invoice 30 days earlier, in return for a 1% discount to the invoice value, equates to a staggering 12.2% APR.

Finding a meaningful return on cash

Finance teams around the world are tasked with finding the right risk/return profile for their organisation. This is especially true regarding the question of cash optimisation and the extent to which a company should expose itself to principal risk in order to chase meaningful yield.

There is one cash optimisation strategy, however, that breaks this rule. What if it was possible to improve the return on your cash by over 1000bps with zero additional risk?

Some context is helpful…

Finance teams and treasurers are tasked with managing risk in a variety of forms; be it liquidity risk, FX risk, interest rate risk, counter-party risk or commodity-related risk. Most organisations are understandably risk-averse and this results in a “safety first” approach.

In relation to cash management, there are two simple choices - leave cash in the bank at the low, risk-free rate or look to achieve superior yield in riskier alternative investments.

In the current climate, neither of these options hold much appeal.

With central banks in Europe and Asia introducing negative interest rates, leaving money in the bank delivers negligible, or even negative, return. Indeed, in the UK our research shows that banks are paying a paltry 0.02% - 0.4% APR on corporate savings.
In regards to alternative investments there are a handful of options available to corporate treasurers, such as overnight money markets or government bonds. The risk-adjusted return on these investments, however, just doesn’t stack up - the additional 5-20bps yield simply doesn’t justify the hassle and/or principal risk.

So what is this magical cash optimisation strategy that breaks all the rules?

Offering to pay your suppliers earlier, in return for invoice discounts, is a proven way to achieve truly significant returns on your cash.

As an example, paying an invoice 30 days earlier, in return for a 1% discount to the invoice value, equates to a staggering 12.2% APR.

What’s more, this strategy carries zero risk. How so? Well, you would only offer to make early payment on approved invoices. Moving the payment date forward changes nothing - the invoice still needs to be paid regardless.
What’s more, by offering early payment to suppliers and improving their working capital position, you are actually reducing your company’s counter-party risk within the supply chain.

Even for companies without the availability of excess cash, the returns on offer via early settlement would even justify borrowing in order to benefit from the arbitrage.

Xelix has been designed to help you manage this process of early settlement across your supply chain. Our plug-and-play solution can be deployed within a matter of days, enabling you to start achieving double-digit returns on your spare cash with minimal resource.

To find out more, get in touch below.

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