Unlocking cash during these crazy times

As individuals, adapting to the impact of COVID-19 has meant embracing a culture of social distancing and working from home.

At the same time companies are having to deal with disrupted supply chains, understanding the new risk environment whilst keeping their operations running and their cash flowing.

Getting visibility over the financial implications you face is an essential step towards understanding and minimising the disruption to cost and cash-flow management. Some organisations would already have been experiencing cash-flow challenges, they will be more vulnerable however many will face the same pressure the longer this situation lasts.

Companies from many industries are seeing the impact on their cash flow as supply & demand fluctuate. Many are asking to increase payment terms, their suppliers will be asking for early payment to address their own cash needs. This is a challenge that needs to be overcome.

Some steps to overcome the cash challenge

An immediate priority is to actively manage the company’s liquidity position, by reviewing existing credit lines available and determining when & how much to draw. It is also important to make sure that there is clear & transparent communication with your banks by sharing your plans for cost containment and working with them to free up lines of credit.

The levers of cash improvement are operational, so it’s more important than ever to re-evaluate how finance operations can unlock cash for the business.

It’s a time to go back to the basics & review the operational levers that impact working capital and cashflow:

Collecting money sooner:

It seems simple, but to do it right requires information accuracy. An easy first step is to focus on invoicing procedures by improving the timeliness and increasing the frequency of invoice preparation. Clearly understanding the contractual credit term and the trigger point for raising an invoice as well as the method of invoicing (e.g. e-invoicing) will also help to speed up the process.

Become familiar with the range of credit terms offered to customers across products and markets as this should identify potential opportunities to reduce or harmonise credit terms. Try to agree standard terms for particular markets or products and ensure any deviation or request for non-standard terms requires a review and authorisation as part of the contract negotiation.

Segment and prioritise customers by size, importance or risk profile and implement a series of proactive collection activities to help reduce overdue invoices. This can include re-defining roles and responsibilities across sales, customer service and credit control to accelerate the resolution of any customer disputes.

Getting control over your outgoings

One way to increase working capital is to delay payments. However, this approach shifts the problem down your supply chain, can result in higher prices and will damage your supplier relationships.

A better option would be to focus on making accounts payable (AP) smarter by linking it with upstream sourcing and procurement functions, and downstream treasury so you have a wholistic view over the interrelated functions. Then try to use available data to generate insights that enhance decision-making.

Take a good look at cash expenditures. Prioritise them and determine the ones that are essential and what can be deferred until the economic environment stabilises.

Analyse areas such as mismatched terms between vendor master data and invoices, due-date calculations, and invoice-prioritization rules are a few quick ways to optimize your cash flow.

Work with procurement to analyse spend patterns and use benchmarks to identify contracts with suboptimal terms, optimize your supplier base and buying channels, and simplify terms. This streamlines the end-to-end source-to-pay value chain, releases cash, and strengthens supplier relationships.

Reducing your inventory:

Inventory management is perhaps the most challenging area in which to unlock working capital right now. Manufacturers will most likely continue to face disruption to their supply chains because of shortages of raw material and components. While supply chains are in flux, revise how you manage safety stock and other inventory areas to keep production going.

Companies – like people – are likely to overstock finished goods given the uncertainty over how long this situation will last, resulting in working capital being locked in your inventory. At the same time, it will be hard for you to predict demand accurately for some time. This requires agile demand-and-supply forecasts and adjustments to balance both customer-service levels and production challenges.

Creating greater inventory transparency, enhancing how you plan for demand and supply, and rationalizing product portfolios sound like major transformation initiatives but will generate long-term savings and improve working capital.

Explore supply chain financing options

Depending on your company's cash-flow situation, there are financing options to consider.

Receivable financing allows companies to receive early payment on their outstanding invoices. A company using receivable financing commits some, or all, of its outstanding invoices to a funder for early payment, in return for a fee, it can have a quick impact on cash flow.

Attempting to implement payment term and payment process changes together could lead to suppliers experiencing cash flow difficulties and disrupt the supply chain. This is where supplier finance (aka Supply Chain Finance) can help by increasing payment days.

A form of receivables-driven financing, initiated by the customer through a financier and a technology provider, supplier finance has the potential to benefit all parties involved. Suppliers obtain earlier payment of their invoices and cheaper financing, while buyers can benefit from early settlement discounts or longer payment terms without adversely impacting the supplier’s cash flow.

Once again, an efficient process is essential so that approved invoices are available for financing by the supplier. Luckily there is help on hand as Procurement-to-Pay software systems are having a great impact on improving efficiency. They help businesses improve visibility into indirect and direct spend enabling better purchasing decisions and increasing the efficiency of the Accounts Payable process.

Another effective tool that can be used to improve cashflow is Dynamic Discounting. Dynamic discounting describes a collection of methods in which payment terms can be established between a buyer and supplier, via smart online platforms, to accelerate payment for goods or services in return for a reduced price or discount. Generally, the earlier a payment is made, the greater the discount. The early payment is funded by excess cash that the debtor/payer may have.

In summary, any changes to your finance operations that result in working capital improvements will help your organisation weather today's uncertain landscape and build a more resilient business for the future.