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How to manage your financial supply chain

Blog By Duncan Khoury – 23 October 2020

2020 has presented supply chain managers with some interesting challenges. Unexpected spikes (or dips) in demand, late payments, and shipping delays are just some of the issues facing businesses worldwide. Weaknesses in supply chains have been exposed, and creating a stable supply chain has become a key priority.

If you’re considering how to better manage your supply chain, it’s time to re-think the traditional physical supply chain model. By taking a detailed look into your processes, and making clever use of supply chain finance arrangements, you can better prepare your business for the unexpected. 

More than one supply chain: the physical vs the financial

When talking about supply chains, most people think of just the physical supply chain – i.e. The system of business, people, and activities used to move a physical product from one location to another. Issues in the physical supply chain can include shipping delays, sudden changes in demand, or stock being held up in customs.

But there’s another, concurrent supply chain that applies to all businesses, regardless of whether you supply a physical product or service – the financial supply chain.

The financial supply chain refers to the monetary transactions that occur between trading partners around the supply of goods and services. It often doesn’t get as much attention as the physical supply chain, however it has a big impact on working capital and the availability of cash to keep your business going.  

If your business sells physical products, you have both a physical and financial supply chain. They’re closely linked, and any weaknesses in one chain will affect the other.

If your business is service based, you’ll have a primarily financial supply chain. It includes incoming payments for your services, and outgoing expenses across things like wages, rent, and subscriptions. 

Regardless of your business’ supply chain scenario, there’s one key factor that has the biggest impact across both – timing. 

It all comes down to timing

The difference in timing of cash going in and cash going out is a key challenge for every business. It directly affects the availability of cash, and your ability to cover costs when they fall due.

And as finance expert, and Octet partner, Alan Miltz says,

“Revenue is vanity, profit is sanity, and cash is king.”

So, now’s the time to review your supply chain and ensure you have the cash you need to successfully run your business.

Financial issues affecting the supply chain

There are some common financial issues that arise from the supply chain.

Whenever you have money that needs to go out before it’s coming in, it creates classic cash flow gaps that you need to manage. Here’s what these gaps might look like in your business:

  • Funding gap – You have suppliers you need to pay before you get paid by your buyers.
  • The growth factor – As your business grows, so does the value of the funding gap. The bigger the gap, the more funds you’ll need to cover it.
  • Moving beyond equity – When your business is in its early stages, you may be able to fund its activities using equity. As it grows however, you may need more funding and more sophisticated solutions to help manage your finances. 

The impact of Covid-19 on the supply chain

COVID-19 has highlighted weaknesses in supply chains throughout the world. 

We saw a perfect example of this in Australia when isolation measures were first enforced. Panic buying saw stock cleared from supermarket shelves, with certain products difficult to access for weeks or even months.

This sudden, unexpected surge in demand left many businesses unable to meet their customers’ needs (a problem that can still be seen in some sectors today). While this was an abnormal event, it highlights one of the risks that can occur within your supply chain.

Another longer term impact has been the lingering uncertainty around closures, restrictions, and potential secondary spikes of the virus. This has affected the mindset of business owners worldwide, and we’re seeing increased requests from suppliers to be paid faster, and from buyers for extended payment terms. The widening gap between buyer payments and supplier terms is creating added financial pressure across the supply chain.

Taking the financial pressure off your supply chain

One of the best ways to manage uncertainty and financial pressure is to look at how you can improve the process and flow of cash throughout your supply chain. Here are some key supply chain levers to consider:

Negotiate more favourable payment terms with your suppliers

By offering suppliers early payment, you can often secure greater control over your financial supply chain as well as potentially discounted rates (allowing you to reduce your costs at the same time). If you need a financial boost to help pursue this, consider the use of Trade Finance to enhance your purchasing power.  

Encourage faster payments from your buyers and secure invoice finance

Incentivising buyers to make payments faster (by offering a discount, for example), can be a great way to shrink your funding gap.

Debtor Finance can also be a smart way to access funds tied up by your debtors. By using your invoices as collateral, you can access funding sources you may not have previously considered.

Consider suppliers and buyers

Are you working with both suppliers and buyers? Can you see available benefits on both sides of your supply chain, but lack the liquid funds to make it happen? A back-to-back funding solution may be the answer. 

Streamline your processes

If you’re using multiple systems and/or still rely on paper for parts of your operations, consolidating your processes onto one integrated platform could help streamline the flow of goods – and cash – in your supply chain, and also reduce your costs.

Use supply chain finance to enhance your process flow

Supply chain finance facilities are flexible funding options that can help you improve your supply chain management, and keep cash flowing through your business when you need it most. With solutions to suit each part of your process, we can help you better manage the timing of your cash flow while also minimising your financial risks. 

Interested to see how we can help tackle your financial supply chain challenges?  Get in touch to discuss the different options and find out what might work best for your business.

Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.