November 7, 2019

How Procurement can boost your cash flow 

We’ve all heard on numerous occasions the old adage “Cash is king!” and no-one doubts the critical importance of companies keeping on top of cash flow.  Whilst traditionally it has been the finance function which has had the responsibility to cash flow management, Procurement has a key role to play too. But how? We’ve identified some of the key aspects of Procurement which, working well with Finance, can have a major positive impact on the cash position:  

Option one is the most obvious one – Cost savings. Every pounds saved immediately boosts cash flow by reducing the invoice values coming into Accounts Payable.  This is partly about negotiating with suppliers to seek discounts through giving them more business, or more security of supply. One big area of cost which companies often forget is overheads or indirect costs. The only way small and medium sized companies can make a step change cost saving here is by joining a buying group to leverage the greater buying power. One example is BSA Buying Group, which covers 24 cost categories (e.g. telecoms, utilities, insurances, travel expenses) and delivers on average 15-25% cost reduction. Joining this group will almost certainly make a positive impact on the cash flow. 

Option two is for Procurement to develop processes to ensure that sufficient checks and balances are in the system to mitigate the risks of maverick buying and fraudulent expenses claims. For example, if the buyer can negotiate with suppliers that only official purchase orders are to be accepted by suppliers, this will help to eradicate orders off contract which are often priced at a higher level (and thereby hurting cash flow). Also bear in mind that invoices can often contain errors which may impact negatively on cash  

Option three is for Procurement to negotiate discounts from suppliers for early payments – it’s a commercial benefit for a supplier who in turn as a reward may be prepares to give away a small amount of profit. Lower costs will then in turn help cash flow for the buyer’s company.  

Staying with payment terms, option four is for Procurement to negotiate extended payment terms. The trick here is to ensure that this is built into contract terms and consistently applied across all key suppliers. As long as the extension isn’t stretched too far, it can really boost cash flow as a one-off hit. But beware over doing it, as it can lead to relationship damage if used as a threat.  It’s also worth noting that even when payment terms have been breached, Procurement can support Finance by engaging with the Supplier’s senior management and reassuring the Supplier that payment will be coming before too long, explaining the causes of the delays. This option is only relevant if Procurement has a deep and supportive relationship with the Supplier and of course, it’s a card that can’t be played too often. 

Option five is ensuring that Procurement are effectively monitoring foreign exchange rates and price indices for raw materials (e.g. paper, plastics, fuels) and that contracts define (hopefully in the buyer’s favour!) what happens when rates fluctuate. Whilst the foreign supplier may be quick to seek more revenues when rates go in their favour, Procurement will help cash flow by seeing improved deals when the rates move in their favour. They mustn’t rely on the suppliers to tell them, as it may not be in their commercial interest to do so.   

Option six relates to customer complaint which results in their slow or non-payment of your invoices. Procurement can help here by tightening up the processes and supply chain rules around root cause analysis and commercial redress when things go wrong. If you wait until the problem hits, it’s likely that the delay in resolving the issue to the satisfaction of the client will be longer, hitting cash flow for longer.   

Option seven is to involve Procurement in the sourcing of, and negotiation with, financial borrowing service providers. Procurement is often not involved in funding supply chains, as its seen as the domain of Finance. However, when going into battle as a team with Finance, the negotiation and commercial skills that Procurement should have in its armoury can really help to secure a lower borrowing interest rate or other aspects of the deal which will impact positively on cash flow. 

Finally, option eight is focusing on inventory levels (assuming you’re not a pure service based firm) and working with the suppliers to optimise stock levels. One example of this is a contingency stock management agreement with the suppliers whereby stock is only paid for when used. We see lots of companies buying excessive levels of stock (sometimes because they’ve been attracted by a lower unit rate by buying a larger volume) which may give the buyer a positive feeling if measured purely by unit price achieved (tick) but eats into cash flow (cross). The negative impact on the cash flow may negate the cost reduction, so the buyer needs always to consider cash flow impact when making decisions on stock volume commitment.


See more content from Buying Support Agency here.


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