How Could Working Capital Benefit From Blockchain?

September 13, 2018
3 Min Read

Most of us have heard of the term blockchain, but what is it and why is it growing? The concept is supposed to change the nature of supply chain management in the coming years. Others describe it as one of the biggest potential disruptors to digital business going forward.

For those who don’t know what blockchain implies, the technology is a public ledger that gets its name from its structure, it is a chain of blocks. Each block contains information, e.g. transactions, that can only be changed by the latest person in the chain (the previous blocks can’t be changed) and it checks the validity of the previous block(s). The ledger is only public to those who are members of the blockchain. As an example, nowadays, it can take a couple of days or sometimes weeks, due to approvals processes, before a transaction is transferred to a foreign country. With blockchain, because of its transparency and traceability, those transactions are performed instantly.

Blockchains consist of a peer-to-peer distributed ledger architecture that makes it easier to create cost-efficient business networks where virtually anything of value can be tracked and traded — without requiring a central point of control.

What are the potential improvements?

As we revealed in our latest working capital survey[1] $2.4 trillion in cash is tied up in payables, receivables and inventory across the United States and Europe. If you only could speed up the payment infrastructure, that will free up a tremendous amount of working capital around the economy.

Consequently, payments through blockchain are an obvious application for the accounts payable process. As such, there is the manual routine matching and approving payments, which is time-consuming and inefficient. If payments are approved immediately as part of a blockchain-managed smart contract (a smart contract is a piece of computer code that is capable of monitoring, executing and enforcing an agreement), why not pay immediately and potentially even claim a discount from your supplier? You can design new financial strategies around this and it will help in improving your Days Payables Outstanding (DPO) and cash flow.

The same positive potential is applicable for the account receivables. At present, invoices are sent before they are reconciled against POs and purchasing systems data, and then paid with each step requiring approval and review, which slows down the process. When introducing blockchain, pre-approved transactions could exist (from point of purchase) with the necessary information to ensure they are processed automatically. This achieves faster transaction processing, leading to an improved Days Sales Outstanding (DSO) and a greater cash flow.

Those are just a few examples of what blockchain can do to improve your DPO and DSO, but the impact it can have on your supply chain and Days Inventory Outstanding (DIO) could be enormous. Thanks to the transparency of blockchain technology, the information is shared, consistent, and reliable across the whole supply chain, which helps to create better forecasting models and results in an improved DIO.  All in all, the potential opportunities to boost your working capital with blockchain seem endless.

What is holding us back from implementing blockchain?

Change is the biggest barrier for large corporate organisation. As a comparison, we currently still see that paper invoices are sent via post, while e-invoicing has been possible for years. Blockchain has its risks and there are definitely still hurdles the technology must overcome, but if blockchain technology promises to deliver, we may expect positive changes in the world of working capital. Like Li Keqiang phrases it: “Changes call for innovation, and innovation leads to progress[2]”.

[1] Link to Hackett working capital survey 2018 US: https://www.thehackettgroup.com/us-working-capital-survey-1807/ and EU: https://www.thehackettgroup.com/eu-working-capital-survey-1807/

[2] Speech by Li Keqiang at the World Economic Forum – Annual Meeting of the New Champions 2013