What working capital planning lessons has the COVID19 pandemic left behind for suppliers? The COVID19 vaccine is here among us. It is now safe to say that the worst is behind us. However, it will be some time before the supply chain comes roaring back.
While overall economic recovery will be V-shaped, recovery at local levels may be W-shaped due to the low creditor and consumer confidence. Therefore it is prudent for suppliers to invest time, effort, and resources in working capital planning for the year ahead and the near future.
If you are a manufacturing supplier, check out these tips on working capital planning to keep your supply chain up and running.
7 Tips on Working Capital Planning for Suppliers
- Ask Open-Ended and High-Level Questions First, ask open-ended questions. Bring representatives from your accounting, operations, and marketing teams on board for a brainstorming session. Ask these representatives to frame high-level questions on what is going to impact your business this year.Keep the questions at a high level without getting into details. That way, you run the risk of filtering out the important stuff mistakingly. Instead, ask macro questions.What is the current status of your cash flow position? Which macroeconomic factors are likely to impact your business? Will these factors play out in your favor or against you?
- Narrow Down to Three Scenarios for Map Working Capital Requirements Once you grasp the macro-level questions, it is time to narrow down the conversation to the most relevant ones. Ask your representatives to engage in an activity on scenario analysis. Let them identify three scenarios: the worst-case, most-likely, and the best-case scenario.The worst-case scenario should reflect another supply chain disruption or a recession. It may mean a shortage of consumer demand and MSME credit , a shortfall in the revenue collection process, delayed payments from your enterprise buyers.The most likely scenario must reflect slow but gradual recovery. It may mean slow but regular receipts of accounts receivables from customers, better cash flow, and slightly shorter cash conversion cycles than 2020.The best-case scenario should reflect growth. It may mean you have higher than expected demand for goods that you manufacture. It will slightly increase your OPEX on purchasing raw materials and intermediate goods and paying wages to labor. However, you will need adequate working capital solutions at your disposal to ensure that you do not miss out on manufacturing orders and projects.
- Reduce Planning Horizons for Faster Speed As an act of precaution, reduce the planning horizon for achieving your objectives of working capital optimization. Remember that the COVID19 pandemic last year had led to fast-paced challenges.The fast pace of challenges has implications for your access to supplier credit, bank loans, contingency margins, working capital, inventory holding, and
supply chain financing.Your cash reserve that may last a financial quarter may last only a month in a worst-case scenario. In the most likely scenario, expect your cash reserve to last a complete cash conversion cycle . Finally, in the best-case scenario, expect faster payments from your enterprise customers and faster cash burnout due to growth financing requirements.
- Analyze Cash Inflow by Customer and Industry Ask your representatives, especially from the accounting and marketing teams, to analyze the cash inflows. Next, ask them to identify the enterprise customers and industry verticals that have the largest shares in the cash inflows and accounts receivables.You will observe that 20% of your customers and industry verticals account for 80% of your revenue pipeline. These insights on accounts receivables will enable your marketing and accounting teams to think strategically on key account management.
- Hunt Prospects from Industries That Offer Lion’s Share of Cash Inflow Let’s talk about your marketing team next. Now that you know the customers and the industry verticals that account for the vast majority of your revenue streams, you can craft a marketing strategy.Ask your marketing team to chase more orders from similar enterprise buyers from the same industry verticals. Let them chase similar enterprise customers in the market. It will allow you to expand your revenue streams, de-risk your cash inflows and grow.
- Identify Line Items That Account for Lion’s Share of Cash Outflow Up next, call your purchase and accounts teams. Ask them to analyze the data on cash outflow, expenses, and accounts payables . Again you will identify patterns.You will notice that 20% of your balance sheet’s line items account for 80% of the cash outflow. Ask your accounts and purchase teams to identify items where you can reduce or cut expenses.Also, ask them to gloss over the 80% of items and check for wastage. Anything that does not boost your efficiency and is non-essential goes to the spreadsheet during a worst-case scenario.
- Explore Alternatives That Widen the Net Cash Flow As the last step, explore alternatives that widen the net cash flow. Search for options to increase the cash inflow on the one hand and, on the other, to reduce or at least delay the cash outflow.On the receipts side, explore invoice discounting terms to get faster receipts from enterprise buyers against a token discount on the bill. Bill discounting may cost you a percentage point of your accounts receivables but enable you to build a contingency margin fund. It is unsecured funding from enterprise buyers that will not need you to mortgage your assets.On the expenses side, reduce inventory holding to reduce working capital blockage. If you have idle cash, consider asking your suppliers for a discount on your accounts payables in a similar fashion.
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