Supply chain finance focuses on minimising the cash held by your suppliers, tied up in stock or waiting to be released by customers.
This in turn maximises the amount of cash held by you.
Supply chain finance is perhaps the most common form of financing used by social businesses. If you maximise the amount of cash in your business, you might not need to look at external sources of finance.
Looking at the cash to cash cycle of a typical enterprise, we can see that staff costs and material costs are paid out before cash is received in from customers. The working capital requirement for an enterprise includes the money tied up in stock and work in progress plus what customers owe for earlier deliveries.
The more an enterprise expands, the greater its turnover and its working capital requirement will be. Many enterprises have failed by missing this simple point. Despite operating profitably and marketing successfully, they have been unable to raise the cash to pay for inputs, leading to dislocation, low productivity, and loss.
Working capital can be kept to a minimum through good management. Work backwards around the cash to cash cycle to see where you can make an impact.
Below, we look at the different aspects of the supply chain and identify ways you can maximise profits at each step:
Credit control on debtors is obviously a very important area of work. Clear terms of trade and special, small supplier status with the corporate customers are amongst the key elements.
You should also look to cultivate a good relationship with the finance departments of your customers, while making sure they know they will get a follow up if their payments are overdue. For optimal credit control, put in place discounts for prompt payment (built into the original price of course) and penalties for late payment (all backed by your terms of trade documentation).
In trades where large invoices are issued and the trade norm is for a long period of time to elapse before payment, it may be worth considering factoring. A factoring company will pay a large proportion of invoice value (normally around 85%) immediately and then collect the money from customers forwarding the balance after fees are deducted.
This removes credit control from your concern and hands it over to experts - it also brings a lot of the debtor balance straight into cash where you need it but it costs money. The improvement in cash flow is immediate, the cost goes on forever because you never dare drop out of the system and lose a month’s cash flow. Think hard before getting addicted.
Invoicing can be a make or break area. Accuracy is very important. Overcharges can be spotted, leading to customer dissatisfaction and delayed payment. Undercharges, on the other hand, can cause loss of image or wipe out profits by not being brought to your attention.
The way in which invoicing is carried out can make an important difference to the cash balances. Ask yourself the following questions: Is the liaison between the person in charge of the project and the person who generates the invoices perfect? Does the person who raises invoices always know the minute that the project is finished and the goods despatched? Is getting the invoice out immediately their highest priority in life? It has been known for invoices to be languishing on desks while staff have received pay cheques late. Does the person who raises the invoice have good information about when stage payments can be invoiced for? Time is money and cash flow is king.
Is the level of stock sufficient to meet demand (you cannot make profits on what is not available to sell) or is the level too high? There is a right and proper rate at which a product should turn over or it should not be held in stock. Existing examples should probably be turned back into money even at a discounted stock clearance price.
There is a right and proper level, based upon demand versus rate of production or ordering time for the stock level of any item. To go beyond this is laziness and the result is money tied up in wasted space. Of course management time also costs. A simple computer programme or home-made routine might help.
This is the value of partly completed jobs where you have added value has and money, but you have not issued an invoice yet. It’s more difficult to interfere at this stage from a financial point of view. Your production manager may have already considered the best use of manpower, equipment and space. Interference from the financial management team would only be a liability.
Sending the message that getting jobs completed and invoiced is a priority can have enormous implications for cash flow. Also, work can be stuck in work in progress (WIP) because no one has got around to raising a sales invoice or moving a project along. Getting the invoice out quickly should bring the cash in sooner and release cash stuck in the cash to cash cycle.
Stock holding of inputs is often an area of weakness. Make sure everybody understands the just in time (JIT) principle. A supply should be there when you need it, but you shouldn’t keep it around because you may need it sometime.
Carrying material stock is often a sign of lack of effort. Organise things to arrive when they are needed. The discount for ordering large quantities is often not worth the space or cash it takes up.
Creditor management is an area of activity as important as debtor management. An enterprise should always endeavour to be an honourable customer and pay accounts as they fall due. Ethical behaviour is actually appreciated and makes good enterprise sense. You will receive attention before the less well-behaved enterprises. Be assertive in obtaining the best possible terms of trade from suppliers and keep these under review.
Get everything dealt with on account as much as possible, for example an account with a local garage rather than filling up the tank using cash. If people have to travel on enterprise, give them a company credit card. This means you can pay their travel and hotel bills over a month in arrears, rather than issuing cash up front.