What is Cash Flow Management?
To put it simply, cash flow is the amount of money that comes into your business versus the amount of money that goes out, from one period to the next. Cash flow management is vitally important to every business as it is a key indicator of financial health. As the famous saying goes ‘cash is king’.
Cash inflow comes from customer payments, receipt of loans, investments and interest on savings. While having cash at your disposal is obviously very important to the running of your business, cash can become available in the form of loans. Positive cash flow, however, shows that your organization is self-sufficient and has an ongoing ability to both generate and spend cash.
Positive cash flow puts you in a more stable position with better buying power and opportunities for growth. It can fuel growth by purchasing more assets, investing in research and development and improving your technologies, amongst other things. These are your cash outflows, along with the likes of employee salaries and rent.
However, over the last few months, many organizations have seen a major disruption to their supply chain which has seen a need to focus on cash flow in order to mitigate damages to the business.
Managing Cash Flow During a Period of Crisis
According to Andrew O’Leary of KPMG, there are three fundamental steps to navigating a cash flow issue – Assess, Engage and Act.
In assessing the situation, you gain visibility and control over cash flows and working capital. By doing this you can then begin to engage with stakeholders that may be affected by your current situation. Once you have engaged and agreed measures, it will allow you to alleviate pressure and begin to manage the situation.
One particular area that you will likely assess to be crucial to your cash flow management is your procurement process. There are four particular procurement actions that you should take to successfully manage your cash flow during a period of crisis.
Procurement Actions for Successful Cash Flow Management
Action 1: Effectively Manage Your Inventory
Holding inventory requires a lot of cash, regardless of the levels, so making sure you consistently achieve the correct levels is key to your cash flow management and protecting your business. Generally, it would be advised to find a level that suits both sales and procurement, where customer satisfaction is maintained and excess, expired stock is kept to a minimum.
During a period of crisis, it is more important than ever that companies strike the correct balance in order to protect their cash flow and maintain operations. Where there are supply chain disruptions, Deloitte advise that ‘businesses will be thinking about securing additional inventory, or strategic stock, as a further buffer against the potential impact of a prolonged or much broader supply chain disruption’. At the same time, if demand plummets, you will have a major problem if you are left with excess stock.
Regular auditing, along with end-to-end supply chain inventory visibility, demand planning, inventory and safety stock policies, production planning and scheduling will ensure that you stay on top of your inventory management and protect your cash flow to the best of your ability.
Action 2: Engage with your Suppliers
Engagement with your suppliers at the earliest opportunity will allow you to understand their situations and determine which suppliers will bring about the least amount of risk to your supply chain.
When engaging with your suppliers, you should re-visit the criteria set out when sourcing them and re-establish the agreements to ensure both parties are protected during the period.
- Lead times from receipt of order to delivery: if you are waiting to receive stock in order to bring cash in your cash flow will be affected
- Minimum and maximum order quantities: bulk orders often bring discounts while you may also need the option of small orders if cash is tight
- Payment T&Cs: does the supplier offer early payment discounts and if not what kind of payment options are on offer?
- Return policy: does the supplier offer the option to return products that are not selling/expired/out-of-season?
- Contactable references: are the suppliers easy to contact when any issues arise?
Once you have established these conditions with your suppliers, it is important to monitor their performance in order to maintain your cash flow. Conduct regular performance reviews and also contract reviews in order to get the most competitive rates.
Action 3: Re-Negotiate Credit and Payment Terms
One of the most effective ways to improve your cash flow management is to lengthen your payment terms with suppliers, giving you more working capital to pay expenses, salaries or to invest back into the business. Having a good relationship with your suppliers will be key to achieving this. Make sure you maintain communications with them either over the phone or via email. Also, make a concerted effort to understand their business as it will put you in a strong position when explaining why the proposal of lengthened payment terms will also benefit them.
Alternatively, you may want to negotiate for early payment discounts, rather than delaying payments, in order to save cash in the long run.
There are many other benefits that can be achieved by having a strong relationship and negotiating with suppliers. You may want to withhold any payment until products pass inspection, have the option to return slow-selling items or change minimum quantity orders.
While having cash available is crucial, cash flow tells the full story of how self-sufficient a company is. Where is your company generating cash, where is it spending cash? Effective cash flow management will provide detailed answers to these questions and protect your business during a period of crisis where supply chain risk exists. Your procurement process has a huge impact on cash flow and taking a strategic approach in the areas mentioned will greatly improve your company’s financial health.