The cashflow your business generates largely depends on how you source and manage inventory stock. A positive cashflow means the business has more incoming than outgoing cash, which gives you greater buying power and puts you in a position to realise greater opportunities for growth.
Business owners know that a healthy cashflow is essential to the success of their business. What they also need to understand is how procurement processes impact cashflow because the two are intricately linked.
Knowing when and how cash leaves your business is critical because even profitable businesses can run out of cash. Companies need to pay close attention to the procurement process and get inventory control right to ensure the business has the inventory stock it needs when it’s needed.
By optimising procurement processes and inventory control you can reduce carrying costs and maximise cashflow.
When you have a good understanding of how much money the company spends, with who and on what products, you can also uncover opportunities where savings can be made. You may also identify areas to consolidate procurement costs by reducing supplier numbers or negotiating better payment terms.
Procurement processes have a huge impact on cashflow and taking a strategic approach to these can significantly improve your company’s cashflow and overall financial health.
The procurement process is an important part of effective cashflow management. While it is equally important to focus cashflow strategies on improving revenues and receivables, you should also keep in mind your supplier-related payables.
Therefore, choosing the right supplier can also have a significant impact on cashflow. Shop around for the best deals and compare different sources to ensure you are getting the best price from your suppliers. Be careful not to compromise on the quality of the product in the process.
When evaluating suppliers, you also need to consider lead times, because waiting to receive stock can affect your cashflow. Be wary of minimum and maximum order quantities which may initially provide some savings, but often require a greater cash outlay and can leave you at risk of carrying excess inventory stock.
Negotiate your credit terms to maximise cashflow and ask suppliers to extend trade credit instead of paying them in advance or as cash on delivery. Trade credit works as a type of short-term loan without interest if payment is made by the due date.
When you chose a supplier, it is important to maintain a strong working relationship with them but to also to monitor their performance. Good supplier relationships are not just about getting competitive rates but also good payments terms, consistent quality and on-time delivery to maximise cashflow.
Whether you are reviewing current suppliers of evaluating new ones, it’s important to consider what their payment terms and conditions are. Do they offer early payment discounts and if not what kind of payment options do they offer? What are their returns policies, particularly with reference to slow-moving, expired or out-of-season stock?
An effective way to maximise cashflow through better procurement processes is to extend payment terms with suppliers, this will leave you with more working capital to pay expenses, salaries or to invest back into the business. The alternative to delaying payments is to negotiate an early payment discount that will save you cash in the long run.
Holding inventory stock takes up significant amounts of cash, so ensure you are consistently achieving the right levels to maximise cashflow. Inventory control affects both your sales and procurement teams because they must work together to ensure customer satisfaction.
Procurement processes need to consider the timing of purchases to avoid tying up cash in assets that are not income-producing. This is particularly important for businesses that carry significant levels of inventory stock.
Effective inventory control is necessary to balance inventory stock levels to reduce waste and minimise the risk of damage to that inventory stock. It will help streamline procurement processes and helps to identify problems at their source.
Online inventory management
Invest in online inventory management to significantly improve your inventory control. Regular analysis of your inventory movements and procurement processes will minimise any excesses and shortfalls, leaving you with the optimum stock levels you need great cashflow management.
Online inventory management enables procurement expenditure to be tracked and monitored in real-time, enabling you to control costs and improve cashflow. It also provides more accurate information to guide cost savings and budgeting.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.