Do you know what inventory cash flow is? Cash flow management is an important part of running a business. It is easy to get caught up in income and spending and forget to keep track of when and how cash enters and exits the company’s accounts. But this may put your company at risk or, at the very least, leave money on the table. It is also easy for you to view cash flow as only a finance department concern, though it is an area where procurement can make a huge difference. Procurement can do a number of things to increase your cash flow, as well as a number of things that can negatively impact cash flow. Effective inventory management techniques require a careful inspection of the whole supply chain. Companies must understand more about the entire process in order to identify their strengths and limitations. Then it would help if you used the correct management strategies to target the operational gaps while improving procedures. Here are several methods procurement can analyze and enhance an organization’s cash flow efficiency:
What is cash flow?
The net share of cash flowing in and out of your business is known as cash flow. The ability of your company to generate positive cash flows in the normal course of business operations determines its success. Inflows of cash into a company include revenue from the sale of goods and services and income from investments. Outflows of cash from your company are made up of expenses and debt payments.
Even profitable businesses can run out of cash, so knowing when and how cash leaves your organization is important. To guarantee that the business has the inventory stock it requires when needed, your companies must pay particular attention to the procurement process and control your inventory properly. This can also reduce costs and increase cash flow by optimizing procurement processes and inventory control. When you are thoroughly aware of how much money the company spends, with whom, and on what items, you can identify cost-cutting opportunities. You may be able to find ways to reduce procurement costs by lowering the number of suppliers and negotiating better payment terms. A strategic approach to procurement operations can significantly improve your company’s cash flow and overall financial health.
Adopt the 80/20 rule
It is also known as the Pareto principle, which states that 20% of all cases result in 80% of all outputs and consequences. When it comes to procurement, the 80/20 rule emphasizes that just 20% of procured things account for 80% of sales or profits. Instead of ordering a broad selection of products that include low-priority items with lower turnover rates, the rule allows procurement managers to focus on the products that produce the most sales. Prioritizing items with the highest return on investment can help you guarantee that the corporate budget is focused on the right things while avoiding superfluous purchases. This technique also enables companies to cut excessive spending and get rid of old products in warehouses.
Implement ABC techniques
Prioritizing inventory is another ABC strategy. Purchasing items are divided by the managers into three categories:
- The A category contains the most profitable high-value items. However, certain products may take longer to sell.
- The B category includes things with a fair value that sell at a moderate to a slower rate.
- The C category includes low-value items that may be less expensive to make as they sell quickly.
Each product category makes a significant contribution to your company’s profitability. You may better understand which items to order at specific times and how to properly manage warehouse space to have the correct inventory levels for each category by ranking products based on these categories.
Inventory stock takes up a lot of money, so you should be sure that you are continually maintaining the proper quantities to maximize cash flow. Inventory control affects your sales and procurement departments because they must work together and interact to achieve client satisfaction. To prevent locking up cash in non-income-producing assets, procurement processes must consider the timing of purchases. This is especially important for businesses with a lot of inventory. Inventory control is essential for balancing inventory stock levels, reducing waste, and reducing the risk of damage to inventory. It will help you simplify procurement processes and identify issues at their source.
Maximizing Value from Payment Terms
There are a number of strategies to take advantage of payment terms and negotiate better conditions. It is preferable for you to pay the invoice early if the seller gives a discount for paying within a particular deadline. If the provider does not fulfill, it is advisable for you to wait until the invoice term expires and keep the money.
It is also possible to deal with suppliers for better terms, such as a discount for early payment or longer payment terms. On the other hand, longer periods may strain connections with your suppliers. It could result in higher charges to compensate for the extended payment time and even a company refusing to do business with you. Therefore they should be utilized carefully.
Procurement intelligence and thorough analytics may find numerous methods to save money and improve cash flow, which is an important part of any successful business. Inventory management and excellent supplier relationships may significantly affect a company’s performance. Listed are only a few examples of how procurement can affect cash flow.
Using analytics in decision making
Keeping track of procurement data like order amounts, pricing, and payment conditions might expose choices that would go unnoticed, such as the optimum time to place an order and the best vendors to buy. To optimize rates, analytics can help you identify opportunities to consolidate your orders and providers. It can also offer you a comparison between current spending and the company’s budget. This not only provides quick, useful data on how actual performance compares to planned spending, but it also makes it simple to change spending as needed to account for a shortage and to take advantage of higher total income than expected.
Using Demand Forecasting
Data analysis is used in demand forecasting to determine your present and future product demand. It is a key strategy for bettering cash flow and capital investments. You can do a demand forecasting in two ways:
- To determine which items to invest in for supply chain management, qualitative forecasting relies on expert judgments about current market conditions and prospective demand.
- Quantitative forecasting makes predictions about future product demand based on recent sales data.
Demand forecasting helps organizations save money by preventing companies from investing in products that are unlikely to sell soon. They can increase profits and direct cash to growth-oriented sections of the business.
Purchasing managers who use successful purchasing techniques might gain more control over your supplier chains. You can forecast which things will be in demand, classify products according to their value and turnover, and invest in those that will generate consistent revenue. You create corporate stability even in times of economic uncertainty by ordering the correct products in the right quantities.
Use data analytics and key performance indicators as key tips for saving on procurement
Procurement data is useful for more than just inventory management techniques and obtaining the best pricing and terms.
- Analytics can be used to compare budgets to actual spending in real-time.
- Buy carefully and get the best rates to protect your business from cash-draining seasonality.
- Identify potential supply chain consolidation and contingency options.
- To capture the value and enhance cost reductions, make sure your team is following internal controls, for example, guided buying with the right suppliers for all goods and services, efficient routing of purchase orders and invoicing, etc.
- To plan to spend in the short and long term, make more strategic decisions.
Analytics also allows you to measure and alter every part of your procurement function using key performance indicators. Internal performance KPIs can be used to track important indicators, including the percentage of invoices paid on time, followed and remedied exceptions, and verified three-way matches.
You can also design and monitor vendor management KPIs to keep an eye on supplier performance and compliance, making it easier to identify your best vendors and rehabilitate and replace those falling behind. And build supply chain resiliency by ensuring it is flexible and responsive enough to protect business continuity both in good times and during bad times. This proactive and planned strategy will not only help you keep your income flowing but will also help you in achieving your financial goals.
Where does your organization make money, and where does it spend money? Effective cash flow management will provide detailed answers to these issues as well as protect your organization during a crisis involving supply chain risk. While having cash on hand is important, cash flow reveals a company’s true self-sufficiency. Your procurement process has a significant impact on cash flow, and implementing a strategic approach in the areas mentioned will significantly improve the financial health of your organization. For better optimization, you can consider the above-listed tips.