By Alex Vavilov, Chief Commercial Officer for Stenn International
Over the last few years, supply chain issues have caused chaos for businesses on a global scale. Supply chain bottlenecks from COVID-19, coupled with the recent Ukraine war, means that severe economic consequences are expected.
Maintaining steady cash flow is essential for businesses at any time but is particularly important during supply chain crises. To minimise disruption, SMEs should prepare strategies for short- and long-term cash flow control.
Supply chain automation
‘Bottlenecking’ can quickly become a major problem for SMEs, creating delays, reducing output, increasing production costs and ultimately putting a strain on cash flow.
From short-term backlogs, such as machinery being out of service, to long-term issues like inefficient operational processes, there are many ways in which supply chains can suddenly become bottlenecked.
Hiring new personnel is also a contributory factor, with companies often citing a lack of skilled labour as a source of bottlenecks. Not having the right workers can quickly spell trouble for SMEs if productivity levels aren’t sufficient to keep pace with demand, particularly during peak periods or seasonal surges for certain products and services.
In 2020, there were huge spikes in demand for products (such as hand sanitiser, masks and plexiglass) that businesses simply weren’t able to meet due to bottlenecking. That’s why it’s so important for SMEs to optimise supply chains.
Supply chain automation is an effective solution to bottlenecking because it increases speed, reduces costs and improves productivity. The adoption of existing technologies means that supply chain processes become streamlined, mitigating the risk of bottlenecks and allowing businesses to become more resilient.
Strategies may include automating time-consuming manual processes which can create delays during peak periods, such as scanning products in and out of warehouses.
Unfortunately, current supply chain woes are expected to continue, with a perfect storm of lockdowns in China, freight fuel prices spiking and increased shipping insurance premiums all leading to further delays at shipping ports. According to recent research, 20 percent of the world’s container vessels are currently waiting outside of congested ports, increasing the risk of bottlenecking even more.
So, what can SMEs do to protect themselves and prepare for disruption? Creating robust contingency plans that forecast potential complications across the supply chain can help.
While businesses can’t be expected to predict the future, they should be prepared to account for all eventualities. This includes even unforeseeable events such as natural disasters and war.
Once all risks have been assessed, an agile plan is needed, one that details how to mitigate threats to your supply chain. This may mean expanding your network of suppliers, increasing safety stock or simply communicating openly with customers to manage expectations.
Once you have a comprehensive business plan in place, it’s time to consider how to budget in order to boost cash flow.
During a supply chain crisis, it can be difficult to foresee the best way to budget money. That’s why flexible budget planning can be a good solution during turbulent times.
Zero-based budgeting is one cost management technique that’s been increasingly adopted in recent years. Instead of evaluating corporate spending based on the metrics of previous years and then tweaking where necessary, zero-based budgeting forces businesses to re-evaluate expenditure by starting at zero and justifying every cost for the year.
For those businesses that are cash-flow poor, zero-based budgeting is effective for identifying cost-reduction opportunities that can help businesses redirect financial efforts towards long-term strategic priorities. This frees up funds to help businesses through periods of disruption.
However, while this method reduces operating costs to a minimum, it is an excruciating process and not one that should be repeated every year. The time and effort it takes to prove each cost means it is not an effective option when decisions need to be made quickly.
Despite the best efforts of any business to mitigate the harmful effects of supply chain issues, there will undoubtedly be times when working capital is needed quickly.
This is when effective management of accounts receivable and payable can free up liquid capital. Building strong relationships with suppliers can help businesses to secure better payment terms for bulk purchases as well as negotiate timely payments from their buyers.
Businesses may also wish to offer customers incentives to repay invoices early to help minimise delays.
However, taking a proactive approach to chasing accounts receivable does not always ensure that payments are received when needed. Generally, buyers prefer to wait until the goods have been received and used before settling the invoice, which could leave suppliers waiting up to 120 days to receive payment.
Money being tied up in extended payment terms can be detrimental to any business needing to bulk-purchase orders quickly to meet demand, or to repay its debts.
Invoice financing services provide SMEs with a solution to this dilemma. By selling outstanding invoices to a third party, businesses can get immediate access to liquid capital without having to wait months for payment from the buyer. Such fast financing can make cash flow more manageable and allow businesses to remain agile in uncertain times.