HOW TO… Manage Procurement Strategically To Maximise Cash Flow

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Author: Matt Goss, managing director, ANZ, SAP Concur

Business owners know that cash is the lifeblood of their business and, without it, the business will no longer be viable. However, many owners fail to fully appreciate the different factors that can affect cash flow. Manual and outdated systems can slow down daily operations including processes that directly affect cash flow.

Cash flow and procurement are inextricably linked. It’s important to focus on managing how cash comes into the business but taking a strategic approach to how cash leaves the business is also crucial.

Getting inventory management right helps businesses get what they need just in time. This reduces the costs associated with holding too much inventory as well as those associated with having to rush purchases or lose sales.

It’s also important to gain full, accurate visibility into the organisation’s on-hand resources and predicted demands. Understanding how much money the company is spending with which vendors and on what products can help uncover opportunities for savings. It may be possible to consolidate providers or negotiate better payment terms.

For example, if payment terms offer a discount for paying by a certain date, then organisations should ensure they always pay on time to take advantage of those discounts. If no discount is available, it could make more sense to hold onto the cash for as long as possible and pay at the end of the term. This lets the business keep cash in hand for longer.

This can save a significant amount of money for organisations that are savvy enough to analyse their procurement and payment data.

It can also highlight opportunities to delay or avoid certain types of expenditure altogether. For example, employees may be in the habit of ordering new stock or materials when the current levels reach a certain threshold. However, the data might indicate that orders can be left slightly later, elongating the purchase cycle for better cost efficiency.

One of the important elements to effective cash flow management is keeping a close eye on the procurement process. While many businesses focus their cash flow strategies on ways to boost receivables, supplier-related payables need to be watched just as prudently.

There are 5 things that businesses can do to maximise cash flow by managing procurement effectively: 

1. Shop for the best deals. To ensure businesses get the best price from suppliers, they should compare different sources to ascertain the most cost-effective supplier, being careful not to compromise the quality of the product in the process. Businesses should regularly review ongoing supplier contracts to get the most competitive rate, and renegotiate deals where they’re not. When looking for new suppliers, businesses should compare a variety of quotes to get value for money.

2. Beware of special deals. While special, limited time deals may be tempting, it’s important not to be blinded by them. Businesses should take advantage of deals and incentives where it makes sense. Some suppliers reduce prices to move excess inventory or may have special introductory rates for new products. However, it’s important to ensure the terms are suitable. For example, buying items in bulk to qualify for volume discounts may save the business money, but it may also negatively affect cash flow with funds tied up in items that aren’t being used immediately.

3. Negotiate trade credit terms. Businesses should ask suppliers to extend trade credit instead of paying them in advance or cash on delivery. Trade credit will work as a kind of short-term loan with no interest due if payment is made by the bill’s due date. By paying suppliers on time and according to their terms, businesses can encourage them to grant additional credit in the future while avoiding costly interest charges.

4. Leverage timely payment discounts. Vendors often provide a discount for timely payment, which can deliver significant savings over the long term. Some suppliers offer early payment discounts as a matter of course while others will only do so if asked. They may be willing to provide the incentive as a way to speed up their own receivables, so it’s always worth exploring this option.

5. Be mindful of procurement needs. When possible, businesses should time purchases to avoid tying up funds in non-income producing assets. This is particularly crucial if the business carries significant inventory. Slow-turning inventory can be a sign of overstocking, which ties up cash and carries additional costs that should be avoided.

 

 

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