Supply Chain Finance, the Next Wave of Business Growth

We’ll start with a story. Step into the world of a large LED light manufacturer. What you see is a complex ecosystem that must work in sync if every part is to keep them at the top of the market. Several suppliers work with you to ensure you get the materials you need on time, at the right price, and of the required quality. You are as dependent on them as they are on you. The other side is a similar story - An array of scattered distributors- some big, most small setups. Balancing this is a fine art, of course. It is also one of strained cash flows and relationships.

Focus on the distributors here. They need enough funds to ensure they have an inventory on hand. It is not surprising that most of these distributors would be struggling with regular cashflow issues. This delicate equilibrium is further complicated by sluggish demands and lending issues they face.

Most distributors — as in the story above and the ones you deal with in real life — have similar tales of trouble to tell. Being small outfits, it is likely they do not have the right documentation to procure working capital loans. A lot of them are also startups and have little to no business know-how.

Being reliant on distributors to move their inventory, manufacturers are taking it upon themselves to manage the situation. Supply chain finance solutions play an important role here. Manufactures can influence the cashflow situation through working capital loans and other methods which ensure the supply chain remains smooth and they can also manage their working capital efficiently.

Is the distributor cash flow issue specific to the last two years, or is it structural?

It is a fact that some difficult questions have been posed in recent months due to the Covid pandemic and the disruptions it brought with it. Consumption has gone down and affected the entire supply chain. But the cashflow issue existed before the pandemic too. The pandemic has just complicated the situation further.

For most distributors, the margins they work with are quite small, especially if you are not dealing with large quantities of products. Having cash in hand to take larger quantities is a solution but it is quite difficult to manage if you are a small business. There is also the option of working capital loans. This is one area that has been impacted by Covid. Banks and financial institutions are reluctant lenders these days.
But even if things were normal, the rates at which these funds are procured would leave distributors with not much at the end. These are structural issues, and are being subjected to a pressure test now, with Covid.

Supply chain finance is the answer

Supply chain finance is a worthy consideration, as it can help suppliers and distributors get funds early, which they can use to finance further product procurement.

With a quicker turnaround of cash in the system, there is more predictability and control. This also helps in working capital management and fuels business growth.

The question is:  how do you seamlessly implement supply chain financing?  Technology plays a key role here, with supply chain financing platforms making things easier for you and your suppliers.

Integrated supply-chain financing platforms go beyond by enabling further capabilities, including treasury management and ERP reconciliation.

Treasury Management

You can derive a lot of value by managing funds that are available in the organisation more efficiently. By ensuring that your supply chain is working optimally, you are influencing your cash management. Your funds can be used to offer working capital loans to your distributors. This becomes a great investment for your cash and it also serves the purpose of infusing capital into your distributors.

Supply fusion technology platforms can help you with this. These technology solutions automate receivables and payables management and also manages

 fund utilisation. You can also manage the credits available to distributors with lower risk through data-backed credit decisions.

ERP Reconciliation

Having tech solutions that work with existing ERPs are important. It enables you to automate your processes while working alongside your ERPs to ensure smooth operation. The CTO or the head of innovation has a role to play here. Streamlining your cash flow is important if you have to invest in your supply chain.

FinTech solutions help you here. Since most of these are external to the ERPs, removing the tech bottleneck also becomes a priority. Next-generation SCT platforms integrate seamlessly with your ERP, accelerating invoicing, cash collection, documentation and more.

Conclusion

Manufacturing organisations can take a leading role in ensuring the stability of the whole supply chain. By offering an early settlement of invoices or through working capital loans, the manufacturer can improve the cash flow significantly for the suppliers and distributors. The value you drive is not just by the cost of funds that you earn but also by fuelling growth in small-cap and mid-cap organisations that are dependent on them.

Technology has a major role to play here. Next-Gen SCF platforms can help make better decisions and help you manage your funds more efficiently. By automating the processes and the communication, you can ensure that your treasury management is more effective. There is a lot of value to be derived from supply chain finance, both in the short and long term. It is also one of these areas where the rewards are manifold for the risks you have to take on. There is some risk of course, but data-backed decisions are key to managing this.

The writer is co-founder, Cashinvoice

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.