Financing supply chains supports optimisation of operating working capital, preserves cash and helps to find the balance and trace where cash is and why it is not equivalent to profits. SMEs are encouraged to have their eyes set on effectiveness of the cash cycle in their business ventures. As they say, profits are opinions, cash is the king! Find the cash in the profits.
Supply Chain Corner
Financing Supply Chain To Optimise Cashflow
By Michael Nzule
An interesting lesson in accounting and usually a challenge to entrepreneurs is balancing cash generated from business ventures with reported profits. They are mesmerised when presented with their financial reports by their accountants which show profits, yet they can’ t trace corresponding cash in their bank accounts.
To demonstrate where the cash can be found in the business, attempts have been made to describe what is known as cash merry-go-round. Starting from capital cash contribution, cash mutates to inventory acquired, credits sales( debtors), fixed assets, and inputs necessary for production. Cash is also applied when payments are made for expenses. All these business events occur at different times( timing differences) and can starve business, required flow of cash( cashflow) if the conversion of cash back to the merrygo round is not done at a faster rate. The main motivation of entrepreneurs is to get cash out of the profits made and keep the business growing. Profits not represented by cash can be frustrating!
Delaying movement of cash out of the business is a critical source of financing. It helps in curing the mismatch in timing of cash inflows( mostly from selling efforts) and outflows. Cash outflows are mostly in form of payments arising from business obligations. The residual cash being what is available for investing activities or to pay the owners of the capital, the share holders, or entrepreneurs.
Sources of business financing are limited. The sources always have associated costs- e. g. interest, legal fees, stamp duty and charging costs for collateral securities and guarantee charges. Access to finances determines the scale of business and ultimately the returns to the investors.
Let us turn our interest to small and medium sized enterprises( SMEs). As indicated above, some of the challenges these businesses face include access to external funding like debt from financiers, keeping up with strict borrowing covenants( which include liquidity and security) and ability to scale up and grow. Getting cheaper alternatives of business financing therefore, becomes an attractive proposition for these businesses. Supply
Financing supply chains supports optimisation of operating working capital, preserves cash and helps to find the balance and trace where cash is and why it is not equivalent to profits. SMEs are encouraged to have their eyes set on effectiveness of the cash cycle in their business ventures. As they say, profits are opinions, cash is the king! Find the cash in the profits.
chain financing( SCF) is one of the cheaper options for businesses to leverage on their relationship with business partners from both the supply side( the traditional supply chain) and demand side( the market and selling side). The singular focus of SCF being to unlock cashflows as fast as possible at optimised costs, and delaying outflows without impinging on business performance and relationships say with suppliers.
SCF offers SMEs access to working capital by facilitating financing along the supply chain. This improves liquidity and reduces financing gaps. Further, the SMEs are facilitated to access credit, purchase inventory, and increase sales through diverse product offerings. Such arrangements help to buttress great relationships with suppliers. SCF provides comfort in business transactions, helps manage risks and due to its nature, it leads to leveraging on technology for efficiency in financing and more engagement among business partners in the supply chain.
To illustrate this, a large retailer may agree to pay its suppliers on extended terms of 90 days, instead of say 45 days standard terms, but proceeds to offer an option for early payment say 7 days from a financial institution at a discount. The large entity in this example extends the goodwill and scale that they have with the financial institution to the SME suppliers. The discounts unlock liquidity and support growth.
SCF can take different forms. The general and simple ones are as follows:
• Invoice financing: The financial institution provides financing to the supplier based on the value of their invoice, with the buyer repaying the institution later.
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