Cash flow strategy: How Procurement helps Finance optimize working capital

As businesses globally face unprecedented uncertainty and supply chain disruption, C-suite finance leaders’ top priority is cash flow optimization. To support corporate strategy and planning, finance departments are devoting significant time to forecasting.

However, nearly three-quarters (74%) of finance executives say their holistic, real-time views of cash flow are deficient, according to research from Forrester Consulting commissioned by Corcentric. “The Future of Finance: 360-Degree Cash Flow Visibility and Control” analyzes senior financial leaders’ views of the current state of accounts receivable (AR) and accounts payable (AP) functions in the U.S., the UK, and France, as well as their perceptions of the future.

The study shows that during the next 12 months, companies will focus on improving the customer experience (66%), increasing revenue (62%), and becoming more insights-driven (61%). Finance teams said they help accomplish these goals through cash flow optimization (71%), digitizing and automating processes (64%), and digitizing payments (57%).

How Procurement aids cash flow management

Procurement and accounts payable (AP) processes have a significant impact on cash flow and the company’s financial health. Taking a strategic approach to these can significantly improve cash flow and help reach corporate financial targets. That’s why it is equally important to focus cash flow strategies on improving revenues and receivables, as it is on improving spending and account payables.

The following are a few ways Procurement can affect working capital and improve cash flow:

• Budget management and forecasting

Procurement budget management plays an essential role in tracking and validating cost savings as well as forecasting the amount of cash coming out of a business. By anticipating the outflow of cash and providing real-time spend data to finance teams, efficient procurement forecasting is just as key to successful cash flow strategies as sales forecasting.

• Purchase orders and budget control

Once budgets are approved, procurement teams need to establish “budget controls” in the procurement process to prevent budget overruns and update the cash flow forecast when necessary. To do so, Procurement needs to ensure all purchases are tied to a budget for approval (OPEX, CAPEX, project budgets).

This proactive cost-control approach permits Procurement to review and control spending before the purchase happens. E-Procurement software is a must-have, as it can automate and enforce corporate budgets by checking purchase transactions against available budgets. Not only does it prevent fraud and save the company money, but it also provides control and insights to better forecast current and future cash outflows.

• Payment and credit terms

Whether you are reviewing current suppliers or sourcing new ones, it’s important to consider what their payment terms and conditions are. Do they offer early payment discounts or other payment options? There are several ways to take advantage of payment terms and negotiate them to support the company cash flow strategy.

An effective way to maximize cash flow through better procurement processes is to extend payment terms with suppliers. This will leave you with more working capital to pay expenses 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.

Pushing out payment terms is a quick way for buyers to generate free cash flow, which, in turn, allows their treasury departments to clean up their balance sheets. Successfully extending payment terms requires careful consideration, though. The process isn’t as simple as demanding suppliers accept payment 30, 60, or even 90 days later than originally agreed upon. Extending payment terms can be painful, particularly for smaller suppliers. Strategy must account for the impact these terms will have on supplier relationships.

• Better inventory management

The cash flow a business generates depends on how it sources and manages inventory (or stock). Inventory management and cash flow are closely linked; you simply can’t have bad inventory management and good cash flow. Holding more stock than what is required for the sales forecast means using available cash to finance excess stock and converting liquidity into non-cash assets. On the other hand, not enough stock can lead to lost sales and customer dissatisfaction.

During a period of crisis and supply chain disruptions, procurement departments are playing an essential role in managing, securing, and optimizing inventory. Inventory auditing and improved visibility, demand planning, review of safety stock strategy, and production planning are among Procurement’s many functions that can improve the company’s cash flow.

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Corcentric commissioned Forrester Consulting to conduct an online survey of 663 cash flow optimization decision-makers at organizations in the U.S., the UK, and France to evaluate the financial innovation progress companies have made and their intentions to pursue effective cash flow management and holistic cash forecasting. Survey participants included decision-makers in finance and shared services roles. All respondents were directors, vice presidents, or C-level executives at organizations making from $750 million to more than $5 billion in annual revenue. The study, which began and was completed in July 2021, is available here.

To learn more about optimizing cash flow contact us or email us at [email protected].