We’ve talked before about how important a supply chain is – and if you work in manufacturing, you don’t have to be told twice.
Even if you’re happy with your supply chain, there’s always something you can do to make it more efficient.
One of these things is supply chain finance. This form of financing has a lot of benefits, but two of the biggest are its impacts on cash flow and collaboration. By understanding these, you can unlock opportunities across your business.
In this post, we’ll look at what supply chain finance is, and the challenges it can solve regarding both cashflow and collaboration in manufacturing.
What is Supply Chain Finance?
Supply Chain Finance involves using financial strategies and tools to effectively manage transactions within a manufacturing supply chain.
Challenges in Cash Flow Management for Manufacturing Companies
Cash flow is a constant concern for any business, but especially for those in manufacturing. Common stumbling blocks include:
- Delayed payments from customers
- A bugbear of nearly every business, delayed payments tie up money that could be used for other essential expenses you have to pay to run your business. This has a domino effect, also impacting your cash outflow.
- High production costs
- This is simple enough – higher production costs = lower profits. This could lead to negative cash inflows, which if not kept in check, could spiral into struggling to pay bills on time.
- Low inventory turnover
- Though having low inventory turnover might initially help you to fulfil customer demands, delayed payments from customers, high production costs, low inventory turnover.
What are the different components involved in supply chain finance?
Depending on the size of the business and the amount of people or companies in a supply chain, there can be any number of components. But some main ones will crop up repeatedly:
The components involved in the supply chain finance process typically include:
- Purchase Orders
- Payment Terms and Negotiation
- Financing Options
- Payment Processing
- Receivables Management
- Technology and Software
Benefits of Supply Chain Finance for Cash Flow
Extended payment terms for buyers
There’s more flexibility in supply chain finance than in other forms of business finance. The upside of this for buyers is that they can make use of extended payment terms, meaning they have breathing room to pay back money over a longer period without the usual negative impacts.
Quicker payments for suppliers
On the other side, suppliers’ cashflow also benefits from supply chain finance.
Instead of being held to rigid payment cycles, suppliers can specify when they would prefer to be paid. This not only means that they can manage their cash flow more efficiently, knowing when payments will be coming in but it also means the supplier can decrease days sales outstanding (DSO), the average number of days taken to collect sales payment. This opens up further opportunities for innovation and growth in other areas of the business.
Reduced reliance on external finance
Through using supply chain finance, businesses can reduce the need for external financing options. This has many benefits. Businesses don’t have to rely on borrowing to fund operations, they can save money that would be spent on things like interest payments, and they take on reduced financial risk.
Benefits of Supply Chain Finance for Collaboration
Improves collaboration between areas of supply network
Supply chain finance promotes deeper collaboration between areas of the supply network on many fronts. The buyer and the supplier are each invested in the other’s success – meaning that buyers may work with suppliers to ensure quality of products.
Meanwhile, buyers can directly help their suppliers, ensuring their viability and maintaining a diverse and competitive supplier network.
Many supply chain finance solutions involve digital technology. This lets users see payment processes step by step, keeping everyone in the supply chain better informed about what stage it’s at. And again, better communication and transparency among stakeholders builds up the supplier-buyer relationship.
The Role of Technology in Supply Chain Finance
As with many other aspects of the modern supply chain, technology is key in the adoption of supply chain finance.
Automated workflows can get repetitive tasks like the generation and processing of invoices and reconciling financial transactions done quicker. This streamlines operations, reduces errors, and accelerates the overall processing time.
Cloud-based systems and online portals mean data, documents and the like can be shared in real-time. This further streamlines a process that supply chain finance itself has already improved, eliminating data silos, and enhancing communication.
Lastly, most supply chain finance technology integrates with existing financial systems. Again, this means information can flow seamlessly across different platforms, and between buyers and suppliers -improving accuracy and efficiency.
With supply chains as vital as they are in manufacturing, it’s sensible to make yours as efficient as possible. Adopting supply chain finance, and associated tech, does that and more – bringing buyers and suppliers closer, helping them become more independent and have more money to spend.
Looking to shake up your supply chain?
PKF Smith Cooper Systems have you covered. Contact us on 01332 959008 or use the enquiry form.
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