4 Procurement Actions for Successful Cash Flow Management

Blog - 11 Oct 2018

What is Cash Flow Management?

To put it simply, cash flow is the amount of money that is coming into your business versus the amount of money going 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.

One particularly important element to your cash flow management is paying close attention to your procurement process. Somewhat surprisingly, it is actually possible to run out of cash while at the same time your business is very profitable. There are four particular procurement actions that you should take to successfully manage your cash flow.

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 growing your business. Inventory management affects both your sales and procurement teams. If you order too little your customers may become frustrated over time and start to look elsewhere. Ordering too much can potentially cause many problems as well. For instance, if you order too much stock you may be left with expired products if you didn’t manage to sell them in time. Similarly, a failure to move on stock to customers may leave you with products that are ‘out of season’ or no longer stylish.

Applying a general rule to your inventory whereby the oldest stock is sold first is advised but for this, you’ll need to ensure that you have an organized warehouse in place.

Problems will inevitably occur from time-to-time though, however, regular auditing will ensure that such problems are kept to a minimum and that you stay on top of your stock levels. You may opt to count all inventory at once, yearly, but this should be complemented by regular spot checks, with a different product counted at each check.

 

Action 2: Invest in e-Procurement Technology

By investing in technology, you will significantly improve your inventory management. Regular analysis of your inventory movements and subsequent prediction models will minimize any excesses and shortfalls, leaving you with the optimum stock levels and successful cash flow management.

The 2018 Procurement Insight Report by PayStream Advisors found that outdated/inadequate technology is a leading challenge for Procurement leaders.

 

cash flow management

e-Procurement technology enables spend to be tracked and monitored in real-time, resulting in controlled costs, cash flow and more accurate information to advise cost savings and budgeting. Savings are made by reducing maverick spending and the removal of paper-based systems.

Technology can also improve your cash flow management through the sourcing and management of suppliers. Procurement platforms firstly speed up the process of supplier negotiations, with the removal of any paper-based processes but also give you the ability to structure spend across suppliers and track spending and supplier activity.

These improvements in the process facilitate volume buying and lower costs. By tracking cost reductions amongst suppliers on a continuous basis, you may spot some gaps and be able to negotiate further reductions.

 

Action 3: Choose the Correct Supplier

Making sure that you choose the correct supplier or suppliers will also have a significant impact on your cash flow management.

Supplier databases should be split into Preferred Vs. Non-Preferred suppliers. Based on our experience of working with procurement and accounts payable teams, we found that non-preferred suppliers typically account for 80% of supplier costs even though they only account for 20% of total spend. Non-preferred suppliers are suppliers that your organization may not deal with on such a regular basis. Typically, this segment will cost you more time and resources than the preferred suppliers even though you spend less with them financially.

cash flow management

Before you begin negotiating with or even sourcing suppliers you should set out your criteria. You should consider the following when drawing up your list:

  • 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 chosen a supplier, it is important, however, 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 4: Negotiate Credit and Payment Terms

As touched on already, e-Procurement technology will have a significant impact on how you negotiate with and manage suppliers. Through centralized tracking of supplier activity and spend, you’ll be able to put yourself in a strong position when it comes to both 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 from 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 present your business with more opportunities for growth and allow you to be strategic and proactive rather than reactive and defensive. 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.

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Posted by

James Duffy

Content Marketing Executive

Posted by

James Duffy

Content Marketing Executive