Updated: Oct 7
By Nir Gendler, Strategist and Researcher at Biz Dev Dynamics Ltd.
The imminence of smart working capital management is not strange to SMEs owners and CFOs. Just a reminder - a better working capital ratio is essential due to several primary factors:
A smoother balance between high season incomes and depletion during low season.
"White Penny for a black day" – enabling relatively smooth operation during a crisis.
Project-oriented companies can finance planning, proposal and extra workforce required until actual income.
COVID-19 Working Capital Management – a Peek at Supplier Finance
The COVID-19 pandemic has been accelerating and radicalizing the influences on companies' operating models. Functional and even fundamental daily conduct now require rapid changes and adjustments. Working capital management is no different. We inspected and compared some of the solutions offered by the UK government, designated to prevent insolvency and assist in working capital flexibility. It is evident that the first and basic survival impulse of a business is to maintain liquidity as financial breath:
Deal with unpredicted delayed cashflows and analyze the changes in demand for the products.
Cope with reluctant financial institutions who are raising the barriers to financial relief entitlement.
We cannot emphasize enough the importance of constructing a comprehensive financial plan. That plan is a complete analysis of the company's attributes and its sector ecosystem. In this article, we would like to point out an angle to be considered – supplier financing, also known as supply chain finance (SCF). Using this option as part of a global financial plan, may be proven invaluable in dealing with some of the pandemics' burning challenges.
Suppliers Finance Can Prove a Long-Term Blessing in Times of Crisis
Sometimes called "reverse factoring", is enabling the supplier to utilize a part of the firm's credit line and obtain up-front payments. SF is part of the capital optimization a company applies and serves not only the financial conduct but also some core functions. The resilience of the supply chain is sometimes the essence of a firm's ability to function. The arrangement raises some essential benefits; some can be measured in longer-term blessings:
Inventory management – better control and prediction of the inventory levels as a result of an SF.
Priority in supply – raising the firm's order lists and requests to the top of the stack is a huge advantage, especially in disruption periods.
Better terms of trade – the payment advancements the supplier enjoys is a sound basis for improved pricing and discounts.
A sustainable business plan for financial institutions – some of the COVID-19 dedicated relief schemes require a financial framework plan, such as the UK's Coronavirus Business Interruption Loan Scheme. Naturally, applying for other financing directions will also require a plan, one of its parts is a viable SF arrangement.
A supplier finance plan is to be implemented after some preliminary steps:
Marking the crucial suppliers in the firm's supply chain – it is a result of holistic analysis, as many parts of the company are stakeholders (production, logistics, CFO, sales and marketing).
Adapting a relevant plan to the firm's operation model – SF plan to maintain a continuous stream of raw-materials is different than a plan for a continuous supply of assembled components.
Fresh thinking – constructing a SF plan will demand a change of mentality. Using some of the firm's expensive resources for an external supplier, although considered a partner, might seem unnatural at first.
Supplier Finance is an option for a financial and operation creative plan to be considered by dynamic companies upgrading their COVID-19 learning curve, and working capital management.