How controlling your supplier payments can unlock cash flow
Every business relies on healthy cash flow to stay afloat and grow.
Generating positive cash flow continues to be a challenge for many businesses. Recent research conducted by American Express found that almost 30% of SME leaders in the manufacturing sector think that getting access to funds to drive is difficult. We have found that many companies find it difficult to forecast cash flow accurately. The result is that this often leads businesses to deprioritise plans to invest in and scale their business.
What role does supplier payments play?
For most businesses, supplier payments represent a significant percentage of outgoings. It has been estimated that B2B payments currently represent more than £19trn of total business expenditure worldwide.
This is even more pronounced in the manufacturing sector. The integrated supply chain is vital to day-to-day operations and efficient payments to suppliers can make all the difference when it comes to business success.
As a result, ensuring a healthy strategy for supplier payments is one of the most important elements to facilitate positive cash flow in any manufacturing business. What’s more, good supplier payment practices are also essential for helping manufacturing businesses negotiate with suppliers – a must-have in a sector built on collaboration and partnerships.
Challenging the status quo
Despite some innovation in supplier payments in recent years, many businesses still use old-fashioned payments systems and single funding sources.
These systems can inhibit growth with inflexible payment solutions, where businesses experience interruption to their supply chain – which can create relationship tension with key suppliers as well as cash flow challenges – and require substantial staff time trying to solve.
For instance, restricted funding solutions can often result in delayed payment; meaning a supplier might find itself in the difficult position of submitting an invoice and being forced to wait for weeks – or even months – for it to be settled by a buyer.
What’s the solution?
Fortunately, there are some fundamental steps that can be taken to help ward against old fashioned payment problems by streamlining supplier payments to keep cash flow positive.
The first step to gaining control of money available in a business is to accurately track and forecast payments and outgoings. Updating a cash flow forecast on a regular basis will provide the clearest possible view of the months ahead and the amount that can be invested in growth strategies.
Create strong relationships with suppliers and customers
It can be easy to allow more immediate pressures to narrow focus down to the short-term. The temptation to insist on longer payment terms with suppliers – or shorter payment terms from buyers – may at times be an almost irresistibly easy way to improve cashflow.
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However, unilaterally altering payment terms can create ill-will and resentment between suppliers and customers. Instead, working with partners to agree payment terms and communicating your expectations clearly can help to foster a good working relationship with others in the supply chain and help to prevent problems further down the line.
Undertaking background checks on all suppliers is also a smart idea, as a way of building confidence that they are solvent and can be relied upon.
Tackle late payments
Staying on top of current debtors is vital for positive cash flow.
The most productive way to do this is through incentives, such as encouraging business customers to pay in a timely fashion through the offer of small discounts or more favourable repeat terms. Equally, an agreed and consistent escalation process that chases up any late payments can be useful for preventing cash flow issues impacting your business.
Make it easy
Making supplier payments as easy as possible for customers can encourage faster payment.
Specifically, using diversified funding sources can be faster and easier to process and can remove the risk of delayed payment. They can also enable businesses to hold onto more of their cash for longer whilst also paying suppliers quickly.
There are a number of funding solutions available in the supplier payments space - including innovative ways of using financing solutions for both payables and receivables, cross border payments and short-term financing. Some of these solutions will put both supplier and buyer on to one platform, allowing both parties control of payment timelines. Many also allow users to carry out checks to detect fraud, asking the customer to confirm a transaction via text or push notification if suspicions are raised.
Other tools can reduce billing errors by assigning a single-use account number to each transaction. In these cases, when a supplier charges the virtual account number, the charge is verified against the currency amount and date range pre-set by the buyer. This ensures the transaction data is aligned, reducing the risk of misunderstandings or tension between suppliers and buyers, and making for easier invoice reconciliation.
For companies that offer longer payments terms, for example, food manufacturers, using supply chain financing options could be another smart move to improve cash flow. Supply chain financing means that once an invoice is approved, the supplier is paid by a third party, directly according to the buyer’s instructions. The buyer then holds on to its capital, until it receives a single consolidated invoice from the third party at the end of its billing cycle.
Products of this kind allows businesses to optimise their cash flow by giving them means to pay suppliers while waiting for payment themselves. Again, this helps manufacturers to maintain good relationships with suppliers.
There is no one size fits all solution for streamlining supplier payments, particularly for an industry as diverse as manufacturing. But by taking a step back to analyse the opportunities and putting in place some practical steps, manufacturers can make great strides towards efficiency and growth.
Pandora and IBM digitise jewellery supply chain
Pandora has overhauled its global supply chain in partnership with IBM amid an ecommerce sales boom for its hand-finished jewellery.
The company found international success offering customisable charm bracelets and other personalised jewellery though its chain of bricks and mortar retail destinations. But in 2020, as the COVID-19 outbreak forced physical stores to close, Pandora strengthened its omnichannel operations and doubled online sales.
A focus on customer experience included deploying IBM’s Sterling Order Management, increasing supply chain resiliency and safeguarding against disruption across the global value chain.
Pandora leverages IBM Sterling Order Management as the backbone it its omnichannel fulfilment, with Salesforce Commerce Cloud powering its ecommerce. Greater automation across its channels has boosted the jeweller’s sustainability credentials, IBM said, streamlining processes for more efficient delivery. It has also given in-store staff and virtual customer service representatives superior end-to-end visibility to better meet consumer needs.
Jim Cruickshank, VP of Digital Development & Retail Technology, Pandora, said the digital transformation journey has brought “digital and store technology closer together and closer to the customer”, highlighting how important the customer journey remains, even during unprecedented disruption.
"Our mission is about creating a personal experience and we've instituted massive platform changes with IBM Sterling and Salesforce to enable new digital-first capabilities that are much more individualised, localised and connected across channels and markets,” he added.
Pandora’s pivot to digital
The pandemic forced the doors closed at most of Pandora’s 2,700 retail locations. To remain competitive, it pivoted to online retail. Virtual queuing for stores and virtual product trials via augmented reality (AR) technology went someway to emulating the in-store experience and retail theatre that is the brand’s hallmark. Meanwhile digital investments in supply chain efficiency was central to delivering on consumer demand.
“Consumer behaviour has significantly shifted and will continue to evolve with businesses needing to quickly adapt to new preferences and needs,” said Kareem Yusuf, General Manager, AI Applications and Blockchain, IBM. “To address this shift, leading retailers like Pandora rely on innovation to increase their business agility by enabling and scaling sustainable supply chain operations using AI and cloud.”
Yusuf said Pandora’s success was indicative of how to remain competitive by “finding new ways to create differentiated customer experiences that protect their enterprises from disruptions to help mitigate risk and accelerate growth”.