Summary
The Problem: Lack of Procurement Coordination & Visibility Impacts Cashflow
Case Study: Delays to planned investment due to supply chain cash flow unpredictability
Benefits of Kavida
Kevin Musprett
Head of Growth
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This article deeps into how to achieve better cashflow predictability with enhanced visibility and coordination of procurement spend execution.
Most companies have 40-60% of revenue tied up in procurement and supply chain, therefore smooth, visible and coordinated execution on spend becomes critical, especially when running lean operations.
Summary
- Criticality of Cashflow Predictability: Cash flow predictability is pivotal for business sustainability, ensuring adequate funds are available for operations, investments, and unforeseen exigencies. Predictable cash flow fosters confident decision-making, aids in securing better credit terms, and reflects a well-managed, financially stable business therefore facilitating long-term growth
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The Procurement Spend Problem: Lack of visibility and coordination in inbound orders creates challenges in cash flow management by inducing unpredictability in expenditure (suppliers) and revenue streams (customers). It hampers accurate financial forecasting, leads to delayed payment schedules and causes reactionary spending.
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Procurement & Finance Coordination: Procurement plays a crucial role in financial planning by providing the finance team with inventory and purchase forecasts, detailing expenditure and expected deliveries. This information is pivotal for accurate cash flow planning. However, if purchase orders are not diligently managed in alignment with order books, the projected cash flow, based around forward order book outlook, becomes erratic, posing challenges for financial stability and accurate forecasting
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Procurement Execution Disruptions: Inbound delays lead to a series of issues including rescheduling, changing purchase orders, late deliveries, delayed payments to suppliers, incomplete customer orders, and subsequently delayed payments from customers. Each of these issues also carries additional costs, further complicating cash flow predictability. The issue is then magnified when dealing with thousands of purchase orders and suppliers
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Achieving Better Cash Flow Predictability: Improved coordination in managing inbound orders aligns procurement with financial planning, ensuring timely payments, spend and revenue recognition. It minimizes disruptions, aids in accurate forecasting, and optimizes inventory levels, thus enhancing cash flow management by ensuring funds are effectively utilized and financial obligations are met.
Financial planning depends on procurement accuracy
The Problem: Lack of Procurement Coordination & Visibility Impacts Cashflow
When there’s a lack of visibility and coordination in handling inbound orders, several issues arise which impact cashflow
- Timing Discrepancies: Goods may arrive either earlier or later than expected, causing a mismatch between planned and actual cash outflows and inflows.
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Change in Purchase Orders: Adjustments to purchase orders due to unforeseen circumstances can lead to financial uncertainties, as costs may change and payment terms may be renegotiated.
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Late Deliveries: When goods arrive late, not only does this disrupt production schedules, but it may also lead to late delivery to customers, affecting revenue recognition.
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Late Payments: When there’s a delay in completing customer orders, it may result in late payments, affecting cash inflow. Similarly, if there’s a delay in receiving goods, payments to suppliers may also be delayed, potentially incurring additional costs.
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Unplanned Expenditure: In trying to mitigate these issues, companies might incur unplanned expenditures such as expedited shipping costs, additional storage costs, or costs related to finding alternative suppliers on short notice.
All of which impact a company’s ability to meet financial obligations, hinder planned investments for growth, mismanage operational costs, adversely affect credit terms with suppliers and lenders, and jeopardize both immediate financial stability.
Case Study: Delays to planned investment due to supply chain cash flow unpredictability
Loreto Electronics planned a significant investment in a new production line costing $10 million, funded by retained earnings.
The company procures over $100m of raw materials every year, placing over 5,000 purchase orders with suppliers. 80% of the spend ($80 million) is with the top 40 suppliers. Among these orders, 20% experienced a small delay of 2-5 days each, and 5% experience a big delay of 14 days each.
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Cost |
Impact |
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Disruption Costs |
Additional cost of $3 million. This included expedited shipping, overtime labor, and having to source materials from alternative more expensive suppliers |
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Revenue Impact: |
The delays resulted in late deliveries to customers, causing a revenue drop of $4 million after customers cancelled other orders and moved to competitors. |
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Cost of Goods Sold (COGS) |
The COGS increased from $100 million to $103 million due to the added disruption costs. This increase the gross margin and net income. |
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Net Operating Income: |
The net operating income fell from $30 million to $20 million, reducing the cushion the company had for the planned investment and other unforeseen costs. |
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Planned Investment: |
With the net operating income now equal to the planned investment, there’s no remaining income to cover other necessary expenditures or unforeseen costs. |
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Potential External Financing: |
The company now needs to consider external financing to cover the planned investment or other critical expenditures, which could lead to interest costs and affect the credit standing of the company. |
The biggest risk to growth initiatives funded from retained earnings is supply chain disruptions
Benefits of Kavida
Kavida enhances cash flow predictability by streamlining supply chain execution (expenditure) and minimise late customer orders (revenue)
- Enhanced Cross-Functional Coordination: Kavida fosters seamless coordination between finance, suppliers, and procurement teams for all communications and documents (invoices) ensuring timely payments and maintaining healthy supplier relationships
- Inbound Order Visibility: Real-time tracking of inbound orders ensures better anticipation of cash flow needs and timings, and ensures forward orders books can be met with planned expenditure
Preventing Late Revenue: Kavida improves control and visibility over inbound orders, helping ensure timely deliveries, which in turn prevents late revenue from customers
Minimising Unplanned Expenditure: Kavida reduces the financial impact of disruptions, thereby decreasing unexpected costs and protecting your business from unforeseen financial burdens
Deana Claessen
Content Manager
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