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Cash flow management strategies to tackle supply chain issues

For many retailers and wholesalers, now may be the first time they’re experiencing a true cash flow crunch. And with ongoing COVID-related supply chain issues, it’s no surprise. Businesses that aren’t used to facing cash flow challenges are starting to see how quickly things can turn.

The good news is that proactive action now can make a difference.

We take a closer look at why cash flow management is so critical in the current environment and cover some practical steps you can take to help your business ride out the supply chain storm.

Current supply chain issues

COVID and lockdowns have wreaked havoc on the Australian and global economy and supply-chains. Over almost the last two years, we’ve noticed:

  • Dramatic collapses and spikes in consumer demand and changing shopping habits – all that holiday money is being spent online.
  • Shipping delays thanks to a combination of COVID, port congestion and online shopping.
  • A x 5 increase in international shipping costs.

Why is a cash flow management strategy important?

Cash management and optimisation is critical to maximising sales and profits. Trading businesses use cash to buy stock, pay for freight, and fulfil orders, well before they receive payment from customers. That time delay from paying for stock to being paid by customers (i.e. the cash conversion cycle) can be weeks or months. If this gap isn’t managed well, it can become a major constraint for businesses and impact stock levels, leaving businesses short on cash and missing out on sales.

COVID changed everything

However, with the onset of the pandemic, many retailers realised they were unprepared for this long and particularly difficult storm.

Sudden lockdowns caught everyone by surprise. Freight delays increased the usual cash conversion cycle, impacting every business along the supply chain. And it’s this sustained supply chain disruption that’s bringing many businesses to their financial knees.

While every business will be impacted differently, an experienced advisor can suggest proactive defence strategies you can put in place to prepare for and navigate future cash flow problems.

Where should you begin?

With supply chain disruptions here to stay for the foreseeable future, the time to change is now. Our tips below can help you prepare, and can help even if you’ve already started to experience cash flow problems.

Be proactive

If you deal with a supply chain, you need to anticipate any potential cash flow challenges. Cash pinch points and short falls can creep up on businesses quickly, even if things look fine now.

Be specific

How do supply chain issues affect your business? Make lists, drill down into the detail, and talk to suppliers, freight forwarders and customers. Put together a realistic view of your specific business and supply chain impacts.

Be prepared

Look at your financial forecasts. Examine both your profit and loss and cash flow projections to give you a clearer picture of current and future impacts. Focus on:

  • Detailed scenarios – sit down and plan for any scenario, including how much each could potentially cost you.
  • Realistic assumptions – broad rainy-day situations and ‘guesstimates’ aren’t enough.
  • Profits – allow for lower stock levels as this will have a big impact on sales volume and profits.
  • Margins – consider how to best manage higher freight costs, including whether these will be passed or absorbed, and what impact this will have on sales and profit margins.

Cash flow management strategies to consider

Negotiate with suppliers to defer payments or reduce prices

Build on established relationships and try to delay payments. At times, it could even be worth paying a penalty to defer payment. Larger suppliers might have sufficient cash and prefer to “fund” sales with you by deferring or discounting.

Consider price increases

Explore what price increases your customers can accept to help cover the rising cost of freight. With many customers now aware of these issues, they may be more accepting of a price increase.

Encourage sales to high margin customers

If you can, focus on your channels and customers with higher margins. It may be a bit of a relationship balancing act, but everyone’s in the same boat.

Consider cost reduction strategies

Crunch the numbers and look at where you spend money to find opportunities to save. Consider alternative suppliers that might have simpler processes, more competitive prices, or faster delivery times.

Buy less stock

Model the impact of buying less stock to have enough cash for longer conversion cycles. Consider what other strategies can be used to compensate for the reduced sales volumes.

Explore finance options

Arranging finance can take months, so plan early. As well as banks, consider non-traditional lenders who may offer more flexibility (both in borrowing and repayments) and can often deliver faster turnaround times.

Communicate with customers

Set realistic expectations, proactively manage delays and issues, and always look two steps ahead.

The importance of effective supply chain management

If the last few years have taught us anything, it’s to expect the unexpected. And protecting your business begins with clear, careful, and considered preparation. As the world emerges from the pandemic, it’s going to take a long time before things are back to anything resembling normal.

Now is your chance to get ahead.

At Slate Accounts, we offer services designed to place you and your business in a strong financial position. We can help you weather the next economic storm with services and strategies tailor-made for your business. To find out how, get in touch with the Slate Accounts team today.

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