How Supply Chain Finance Can Drive Cash Flow

This is an excerpt of the original article. It was written for the January-February 2011 edition of Supply Chain Management Review. The full article is available to current subscribers.

January-February 2011

No question about it, we have a lot of sophisticated and veteran supply chain professionals who read SCMR. Certainly, over the course of their careers, these individuals have demonstrated a knowledge and mastery of the fundamentals of our profession. But interestingly, every time we run an article that covers the basics of supply chain management—or conduct a reader survey of topics of interest—we’re pleasantly surprised by the overwhelmingly positive response the “fundamentals” receive.There’s got to be a reason for this counterintuitive result. I haven’t put it to deep analysis yet, but it’s logical that information on the basics…

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Business leaders have one big reason to be happy these days. Most are heading up companies that are sitting on historically high cash balances. Research by FinListics Solutions shows that in the United States, companies outside of financial services—retailers, distributors, manufacturers, and telecommunications providers, for example—have accumulated almost $2 trillion in cash among them. At companies with more than $1 billion in revenue, cash was equivalent to 8.5 percent of revenue in 2009 compared to 5.2 percent the year before.

Laudable though those numbers may be, they are still not enough to give businesses the long-term resilience they need to sustain growth, let alone to out-compete in today’s volatile global economy. That is why many leading companies are focused on initiatives to further improve cash flow and liquidity. One of these is better management of the cash operating cycle, which is the net number of days in inventory, accounts receivable, and accounts payable.

This article explores the use of supply chain finance (SCF) to better manage the cash operating cycle. SCF can lengthen accounts payable without hurting suppliers’ financial viability; at the same time, it has the potential to lower direct purchasing costs as well as the costs of the procurement transactions themselves. The concepts are well proven, and the tools and techniques are not new. But they are still not used by supply management teams to the extent that they should be. Given the broad-based hunger for improvements in cash flow, the time is right for a short refresher course on the topic.

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