Risks with Supply Chain Financing Every Business Must Know
How to choose invoice automation solutions.
Supply chain financing refers to the flow of money along the supply chain. As with any other business process, supply chain finance can also be optimized, not only internally (within the company) but also from the point of view of external stakeholders within the supply chain. Don’t forget, supply chain financing also goes hand in hand with working capital management.
Many companies are beginning to recognize the importance of adequate working capital to protect their business in these crucial times. They are looking at supply chain finance to realize locked cash and improve their processes.
The goal of supply chain finance management is to improve visibility over cash cycles, orders, invoices, reconciliation, and payment. Most companies overestimate the extent to which they can get their suppliers to extend their payment terms. Many of them are also not aware of financing opportunities such as supply chain financing and dynamic discounting. Moreover, many small SMEs don’t know how to optimize their working capital. Let us see the risks that a company may face in supply chain financing.
From a long time, companies focused on B2C engagement (as they should because that is what brings the money in). Offering your customers, a choice of channels for bill payment is the norm today. But at the same time, companies must also ensure that their financial transactions with their partners are also optimum. The internal finance function in most companies is often slow and out of touch with the times. And when it comes to financing, agility, speed, and transparency should be the bywords.
One of the main reasons’ companies don’t pay a lot of attention to back-office functions like finance is because they consider it a cost center. As a result, these processes often consume excess resources in terms of time and effort. Of course, you can always outsource the finance function, but that doesn’t help your suppliers who will still be worried about delayed payments, lack of communication with little or no visibility. If you are concerned about slow finance processing, consider giving SkyscendPay a try. It’s a cloud-hosted Blockchain and Artificial Intelligence enabled platform that streamlines your invoicing process, making it faster and more efficient.
Unpredictable and unreliable cash flow
Companies often complain that their cash flow is not reliable (unpredictable). This may be because of many reasons. One, you ignore your payment terms. The exact time when you receive or send money doesn’t correlate to your payment terms. Second, you make unrealistic predictions. While everyone would like to receive money on time, it may not happen for various reasons.
Third, you don’t cover all the popular scenarios that could affect your cash flow. It pays to prepare for multiple scenarios. Fourth, you don’t update the cash flow forecast once you have prepared it. For example, how many companies update their forecasts once they realize that the payment will not come in time?
Finally, you don’t prepare for the changed situation. Once you’ve identified the problem, you don’t take steps to rectify it. For example, now that you know SkyscendPay has onboarded supply chain financing (and dynamic discounting), what stops you from taking advantage of it? Companies facing problems with their cash flow must consider using cash flow forecasting to monitor their cash flow and put in place contingency plans in case of unexpected shortfalls.
Invoice processing is a costly affair. While there is no magic number involved, there are various estimates of how much it costs to process an invoice depending on who is doing it. According to research firm Sterling Commerce, it costs between $12 to $30 to process an invoice. Others have estimated the cost to be as high as $40. The cost is directly tied to your A.P. function and the efficiency with which the concerned staff process the invoices.
However, regardless of how efficiently you process your invoices, manual invoice processing will still cost you much more than Blockchain and AI-enabled automated invoice processing.
To get a better understanding of how much it costs you to process invoices, you must know what goes into processing an invoice. One, total time taken to process the invoice. Two, time spent reviewing the invoice. Third, time taken to rectify mistakes in the invoice, identify duplicate invoices, etc. Fourth, shipping cost if it is a physical invoice. Fifth, penalties incurred due to errors or delayed payments. Fifth, total number of hours your staff spends to review the invoices taking time off from other tasks.
An automated system like SkyscendPay not only eliminates paper and postage, it also makes the process more accurate and takes much less time to validate. All these translate into faster approvals, greater productivity, and reduced incidences of fraud.
High DSO (Days Sales Outstanding)
A high DSO number means that a company is selling its products to its buyers on credit and then waiting a long time to collect payment. Most SMEs are forced to offer delayed payment terms to their buyers. And this when cash flow is indispensable to success. Delayed cash flow is one of the main reasons why small companies lose sleep and go out of business. Here are some statistics from Intuit’s ‘State of Cash Flow’ Report (covering 3000 small business owners across the U.S., UK, Canada, Australia, and India).
- 69% of small business owners report losing sleep over cash flow
- More than half of U.S. small business owners’ companies have lost $10,000 or more by losing a project because of cash flow problems
- More than 60% of small businesses regularly face issues with cash flows
- Among those companies who are facing cash flow problems, nearly a third are either unable to pay loans and vendors or unable to pay themselves or their employees
If you want to help your suppliers, consider using an automated invoice and procurement processing solution like SkyscendPay. Our solution not only gives you the ability to use dynamic discounting to help your suppliers realize payments faster, it also allows them to opt for supply chain financing from reputed banks. And all this while making the invoice process faster and more secure.
The Covid-19 pandemic and the consequent worldwide economic unpredictability have tightened the flow of credit, affecting trade and increasing financial pressure not only on buyers but also suppliers. This has led to an increase in risk, which companies must manage proactively. Financial supply chain management gives companies an objective view over the entire process, helping companies to protect their supply chains. To learn how SkyscendPay can help you simplify your invoicing and procurement process, take a free demo