Cash is King: A Lesson in Tesla’s Face-Off with Suppliers
Buried within the ongoing Tesla soap opera is a gem of a lesson for all finance leaders.
For those of you that have been following the Tesla saga over the past few weeks, if you look beyond the Twittersphere and corporate governance issues, you may have noticed some chatter around Tesla suppliers fretting over getting paid.
It’s true that Tesla is leveraging its financial position to retroactively negotiate major discounts with suppliers, and whether or not this is a move out of strength or weakness remains to be seen. But that’s not so important when it comes to understanding the more nuanced point that all businesses should take away: There is tremendous upside – including tens of thousands of dollars in savings – that comes with a well-thought-out cost and cash management strategy. And this strategy starts with the accounts payable function.
Accounts payable is not just a matter of “keeping the lights on,” but also an avenue for true cost management.
Accounts payable is a job function often equated to the simple responsibility of “keeping the lights on.” It has existed largely the same way for the past several decades, and finance professionals have been underestimating the operating costs of AP by over 100%. A typical AP workflow looks like this:
- Collect paper or emailed invoices from vendors
- Dole out paper copies and emails to appropriate department heads requesting approvals
- Spend hours keying in data and GL accounts
- Mail a check to the vendor – literally. 50% of B2B transactions occur by check.
What is the impact of all of this manual work? Lots of missed opportunity. For many businesses, the AP function is spending all of its time working hard to simply pay the bills. Yet, this function controls one of the most important aspects of a business: the outflow of cash. As Tesla is now negotiating rebates ranging from 9% to 20% of what it has previously paid suppliers, it is revealing that when you hold the cash, you hold the power.
While Tesla’s scale provides more leverage than most other businesses, don’t think that this lesson only applies to large companies – it applies to any business, regardless of size. Where you manage the cash, you manage the power. And the data suggests that power could be very beneficial to your business. Between negotiating more favorable pricing terms, reducing unnecessary vendors and costs, taking advantage of early pay discounts, and rebates from electronic transactions, most businesses can see a return of 1 – 3% of all vendor spend. This might not sound like much, but it equates to tens of thousands of dollars for a small business and hundreds of thousands for mid-size businesses.
This lesson is further validated when one looks at cyber fraud. Many cyber fraud schemes are aimed at poor controls and poorly managed accounts payable functions in order to fraudulently extract funds from businesses. The fake invoice, the urgent need for a wire to some foreign country, or a spoofed check are all examples of cyber criminals taking advantage of the fact that they know that the outflow of cash is often not well-managed at many companies. The number of companies impacted by a cyber fraud incident last year was well over 70%.
Unlike many aspects of the Tesla soap opera that provide a cautionary tale, using accounts payable as a point of strength is an example that every business can benefit from following.
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