Optimal Cash Management with Payables Finance

Payables finance, also known as reverse factoring or supply chain finance, is a form of trade finance arrangement that provides a supplier with the option to receive a buyer’s payables early while allowing the buyer to extend its payment due date. The recent adoption of the blockchain technology has the potential to make payables finance more efficient and secure. In this paper, we study the supplier’s optimal cash policy under such a “frictionless” payables finance arrangement. Our work extends the classic cash flow management literature in four fronts: (1) we introduce the salient features of payables finance into the cash flow problem; (2) we allow cash flows to be temporally correlated; (3) we adopt a general risk-aversion utility framework for the problem; and (4) we consider a more realistic integrated cash balance model, that is, all interest gains and costs are allowed to accrue together with the cash balance in a single sum. We find the optimal cash policy possesses the “non-borrow-up-to” and “non-invest-down-to” features that differ from the classic (L, U) policy known in the literature. We further quantify the value of payables finance to the supplier and determine the equilibrium payment term extension for the buyer. We show that it is the cash liquidity enabled by payables finance to hedge against cash flow uncertainty that generates value to the supplier. To tackle the computational challenge of the problem, we derive easy-to-compute heuristic policies and system bounds. Numerical studies show that heuristic policies achieve near-optimal performance. Finally, we present results from applying our model to data sets obtained from a major U.S. chemical company.

Supplemental Material: The computer code and data that supports the findings of this study are available within this article’s supplemental material at https://doi.org/10.1287/opre.2022.0196.