Payment Terms

Multifaceted payment strategy improves accounts payable efficiency among a diverse supplier base

Sodexo is a global company that provides an assortment of services to other businesses, including catering, facility maintenance and management, and employee benefits. Pre-Covid, the company’s North America region generated more than $ 10 billion in annual revenue empowering organizations in industries such as healthcare, education, oil and gas, sports and recreation to focus on their core business. Within a hospital, for example, Sodexo may provide cafeteria, patient porterage and concierge services, as well as the operation of the gift shop.

The Covid-19 pandemic has had a significant impact on some of the industrial sectors served by Sodexo. The company’s North American treasury team and shared payment service center were already re-evaluating their payment processes. “Years ago, the industry standard was to give customers 30-day payment terms, and we usually had slightly longer terms to pay our suppliers,” says Marc Blass, vice president and treasurer of Sodexo North America. “As our business grew, the model generated working capital for us. This model began to change long before Covid – many of our largest global clients saw an opportunity to extend their terms as consolidation in our industry increased competition. “

But the pandemic hasn’t helped. “We continue to feel the pressure,” Blass adds. “Some large global customers are asking for extended terms, and holding on to those receivables puts pressure on our working capital. … As the money coming in started to arrive more slowly, we had to find ways to slow down the rate at which the money was coming out.

Blass and his team didn’t just want to extend payments to their suppliers. He explains: “With many of our major suppliers, we see our relationship as a partnership. A simple generalized increase in payment terms would not be the way we perceive our supply chain partners. “

Two alternatives were more attractive, although neither worked well for all providers. The first was payment cards. “When you pay your provider with a card, you gain an additional 30 days to pay your bank. This essentially increases your payment terms, ”says Blass. This seemed like a good solution for suppliers who sold to Sodexo in small volumes. However, says Blass, “we spend over $ 1 billion with our biggest supply chain partner.” At this volume, card processor fees made payment cards unattractive. For the company’s largest contracted suppliers, a different approach, supply chain finance, offered an alternative way to lengthen Sodexo’s payment term without forcing suppliers to wait for cash flow.

“We felt that supply chain finance could create a real win-win situation for our large suppliers,” says Blass. “Not only could suppliers receive their funds faster, but they could also take advantage of Sodexo’s creditworthiness in the discount that occurs between them and the bank. Many of our suppliers borrowed funds based on their own creditworthiness. Since Sodexo is a highly rated company, a product such as supply chain finance allows us to extend our creditworthiness to these suppliers. Even when we increased our payment terms with them, their total cost of capital might actually be lower. “

However, this approach did not make sense for small suppliers. “With supply chain finance, there is a lot of work involved in setting up new suppliers, so it may not make sense for suppliers with whom we have on-time payments or low volumes in. dollars, ”says Blass. “If we can put a map in the purchasing manager’s hand, a lot of the reporting and the administrative burden is gone. “

Thus, the treasury team worked with Citi to develop two new payment programs. The Visa Payables virtual purchasing card program consolidates company-wide payments to a specific vendor and streamlines processing. Business units use the standard company process for invoice submission and approval, but rather than paying by check or ACH, the Accounts Payable (A / P) team sends a consolidated payment file to Citi .

“We could have 100 business units purchasing products from a particular supplier,” says Mark Dobosz, senior finance director and purchasing manager to pay for Sodexo North America. “These companies don’t know if the supplier has been enrolled in the virtual card program. They hand in their invoices, and we send a file to Citi authorizing payment. Then, Citi generates a virtual card number and sends it to the vendor, who processes the card number using their existing credit card processing.

Managers of the company’s field operational units also have the option of using plastic acquisition cards to make one-off or emergency payments, eliminating the need to configure these vendors in the A / P system. and minimizing the need for unused petty cash at business units. Whether the buyer uses a virtual or physical card, Sodexo North America earns an additional 30 days to pay.

Meanwhile, the treasury group has developed a supply chain finance program that gives large strategic suppliers the ability to receive funds faster, even as Sodexo has extended payment terms by 30 days for the most suppliers. Those who enroll in the program can sell their receivables to Citi in exchange for payment within 10 to 15 days of the date the invoice is approved by Sodexo. This extends Sodexo’s credit strength with Citi to suppliers, while standardizing payment terms and improving working capital.

Both programs are large. The supply chain finance program processed significantly over $ 1 billion in spending in 2019. And the combined virtual acquisition card and physical acquisition card program, which encompasses the processing of more than $ 1 billion. 300,000 bills per year and includes 4,500 physical cards, represented well over $ 100 million in annualized terms. volume in 2019. Streamlining accounting and reconciliations has been crucial in the development of both payment methods.

To this end, Sodexo North America’s shared payments service center has created a liability account in the company’s SAP enterprise resource planning (ERP) system for each program. When the company sends a batch file to Citi, it considers that each payment has been made and transfers it to the SAP passive account. But the payment is only actually funded when it is contractually due – when Citibank debits Sodexo’s account, in the case of supply chain finance, or when Sodexo pays its monthly acquisition card statement to its account. due date. Reconciliation is crucial to ensure that payments deemed to have been made have actually been funded.

“For acquisition cards, we worked with the team that developed our expense reporting tool to determine how we could create a report identifying transactions that have already been posted in our billing cycle but have not. been published, ”explains Lorene Mietz, Supplier Manager. , in the shared payment services center. “We generate reports from Citi Manager for plastic cards and Visa for virtual cards. These reports specify which transactions have already been included in a payment that has been made and which are still pending processing. I use it to reconcile card payments within SAP.

Reconciliation follows a similar path for the supply chain finance agenda. “We create a separate liability, which we transfer to the liability account to reflect the fact that we made the payment through vendor funding,” says Stephen Dabrowski, senior accountant and invoice processor. “A system called Frontier automates the reconciliation of financial transactions across the supply chain. It pulls data from Citibank and SAP, and automatically combines all of those transactions to confirm that what we have approved is what we are funding.

A key concern in developing this approach was that it could create confusion among vendors. The treasury team worked with the company’s supply management team to educate suppliers. “Presenting too many options would have led to many avoidable questions that our procurement management or accounts payable teams should have resolved,” says Blass. “So we separated our suppliers based on their annual expenses and other factors, and offered each supplier the program that best suited our relationship with them. This has been important in maintaining the effectiveness of both programs.

He estimates that as a result of this payment transformation, Sodexo North America has reduced the number of check and ACH payments processed annually by more than 300,000. It generated a cash benefit of over $ 100 million per year through the actual expansion in terms of a significant portion of the company’s purchasing volume.

According to the team, the keys to the program’s success were the flexibility of stakeholders as they explored options, and “test, test, test,” says Blass. “When you get into a new program like this, make sure the files are sent and then come back as they are supposed to.

“For years and years, we just did ACHs and checks,” Blass concludes. “Then we introduced a new payment method, by sending a file to our bank. We have learned a lot from this process, and at this point everyone on our team has become an expert on how to create these types of programs. Now we are building on these learnings to add more batch payment files under different programs. We are building on our successes with this program to continue to improve efficiency across Sodexo North America’s treasury and payments groups.

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