In order to understand financial flow in supply chain management, it is important to first understand what is meant by the term “financial flow.” Financial flow refers to the movement of money in and out of a company as it relates to its supply chain activities.
This article will focus on the different types of financial flow in supply chain management.
The Types of Financial Flow in Supply Chain Management
The Cash-To-Cash Cycle
Cash-to-cash is a term used to describe time between when cash comes into your business and then is paid out again, usually by wire transfer or check. Simply put, it is how long it takes for you to get money in and then to pay it out again.
The cash-to-cash cycle is important to understand because the shorter your cash-to-cash cycle, the better you are able to manage your business. The longer it takes for you to get cash into your company and pay it back out again, the more money you lose in interest fees and opportunity costs.
The cash-to-cash cycle can be broken down into three different parts:
1. Receiving money from customers payments
2. Collecting accounts receivable
3. Making payments to suppliers and employees
The Financial Supply Chain
In a nutshell, what is meant by “financial supply chain” is how money flows through your business as it relates to your supply chain functions. The term “supply chain finance” often gets thrown around in industry vernacular; however it is really just a sub-component of the financial supply chain.
Each financial supply chain has 5 components:
1. Cash sourcing
2. Customer finance solutions
3. Supplier finance solutions
4. Capital assets and inventory financing
5. Working capital management applications Each of these components are described in more detail below.
Proper cash management is one of the most important factors when it comes to liquidating your company’s working capital. Sadly, most companies do not know where their money is or how to best manage it on a day-to-day basis. The first step in effective cash management is to know where your money is and how much of it you have.
In order to properly manage the cash-to-cash cycle, a company needs 3 things:
1. Real time information about sales and payments
2. Segmenting customers by risk for true credit analysis
3. Rapid payment or clearing solutions
Customer Finance Solutions
There are 3 types of credit that you can offer your customers:
This is where you simply allow your customers to open up accounts with you, no questions asked. The main benefit of offering an open account solution is that it saves the customer time and money by not having to fill out a credit application.
This type of solution works best when a customer has an established relationship with your company, however they have no immediate need for financing.
This type of solution allows you to immediately assess a new customer’s ability to pay, based on their credit score.
Supplier Finance Solutions
The main benefit of working with suppliers who offer financing is that it will give you the flexibility to purchase more inventories then you would otherwise be able to without the financing tools. This is particularly helpful during the winter months, when you need to purchase more inventory than usual in order to meet customer demands.
You should also consider partnering with suppliers who offer early payment discounts on qualified purchases. The downside of this type of arrangement is that it can be costly if you find yourself having to pay for unqualified items.
Managing the financial supply chain is essential for any business looking to optimize their working capital. By understanding where your money comes from and how it flows through your company, you can make more informed decisions about how to allocate your resources. Implementing the best practices we’ve outlined above will help you get started on the path to better cash management.