Maintaining steady and reliable cash flow is one of the most challenging parts of running a business. Not to mention positioning it for growth and then realising that growth potential. In extreme cases, cash flow disruptions can result in missed opportunities, lost customers, product quality issues, and even the failure of your business. Worse, these disruptions don’t necessarily have to strike at your business directly to cause real damage.
Cash flow interruptions that affect any business in a supply chain can have serious adverse effects on your business. Just ask anyone who had dealings with the Cooper & Oxley. While many tools exist to address cash flow issues within your own business, few business owners take serious steps to stabilise their supply chains. As recent research in Australia and elsewhere shows, a large percentage of businesses increase the risk of dangerous disruptions by paying supplier invoices late. A Supply Chain Finance solution aims to change that by giving customers the power to protect not only their own cash flow, but also that of their suppliers.
Empowering suppliers to stabilise their business
Supply Chain Finance is a tool that allows businesses to work with their suppliers to help stabilise their cash flow. Specifically, it allows your suppliers to take early payments on demand for their invoices in exchange for a small early settlement discount. Those early supplier payments are financed through a ‘credit fund’ and repaid later – when your own cash flow permits. This allows the suppliers that you rely on access to the funds they need them, without placing any additional financial strain on your cash flow. Small business suppliers who are sometimes forced to wait weeks or months for desperately needed payments can use this to address cash flow shortages that would otherwise be a serious threat to their business. As a result, they’ll be a more viable supplier which reduces the chance of disruption to your business.
Improving your cash flow while supporting suppliers
What makes this such an attractive option is how the process works. The financier pays the early payments to your suppliers on your behalf and this does not require any actual borrowing or security from you. The size of the ‘credit fund’ that is provided to your business is based on the results of a confidential check with relevant credit insurers. Check out our previous blog post on Best Practice Credit Control – the 4 Fundamentals
Flexible funding with no recourse to you or your suppliers
The capital for the fund is provided by the financier and is insured instead of secured the way a traditional loan would be. When a supplier needs a payment, they select the invoice they’d like early payment for and when they’d like to be paid by i.e. before or on the invoice due date. If they choose an early payment they can see the discount size before deciding. This puts them in complete control. Even better, they can opt for full or partial payment of an invoice, meaning they’ll never be forced to discount a larger amount than they need.
Rebate on funds utilised for the Customer
As the company offering the early payment, you receive a portion of the discount fee received by the financier if you settle the invoice with the financier when due. Effectively, this enables you to earn a return on funds you didn’t invest. And there is no cost to you to offer this facility to your suppliers.
Improved financial flexibility for customers as well as suppliers
Since all your supplier payments can be made from the financier’s ‘credit fund’, you gain significantly more control over how and when you make the payment to settle the balance. You have a more flexible and predictable cash flow, even as you ease the cash flow issues of your suppliers.
The entire process is specifically designed to be clear-cut and transparent for all parties. As the discount is determined by the supplier, and the process involves no borrowing, no security, no interest or hidden fees, you and your suppliers are both protected from any surprises. All costs are clearly disclosed up front and the signup process for the supplier is done entirely online
Supply Chain Finance is a valuable tool that’s designed to provide businesses with the power to better control their own cash flow, even as they empower and stabilise their suppliers. As a result, your business is better able to weather cash flow interruptions and less likely to suffer supply issues. At proCFO, we help you with your financial management and bookkeeping services in Perth, WA so you can focus on what really matters: innovation and growth.