How Procurement can Help Maximize Cash Flow

Mar 6, 2017

Managing cash flow is an essential part of running a business. It is easy to focus on revenues and expenses, and neglect to monitor when and how cash enters and leaves the company’s accounts, but doing so can put the company in danger, or at least leave money on the table.

It is also easy to think of cash flow as purely the domain of the finance department, but it is an area that procurement can have a significant impact on. There are several things that procurement can do to improve cash flow, and likewise, several actions that can negatively affect cash flow. Here are some ways that procurement can monitor and improve an organization’s efficient use of cash.

Inventory management

Good software programs and attention to detail are invaluable to inventory management, and optimal stock levels make for better cash flow. By carefully monitoring inventory and taking advantage of data analysis and prediction, it is possible to minimize excesses and shortfalls. This means less money tied up in inventory, as well as less danger of losing sales due to running out of stock.

Using analytics in decision making

Tracking procurement data such as order quantities, prices, and payment terms can reveal options that might otherwise be overlooked, such as the optimal time to make an order or the best vendors to buy from. Analytics can help point out ways to consolidate orders or vendors to improve rates. It can also compare real-time spending to the company’s budget. Not only does this provide quick, valuable feedback on how current performance compares to planned spending, it also makes it easy to adjust spending as necessary, to account for a shortfall or take advantage of higher total cash than expected.

Maximizing value from payment terms

There are several ways to take advantage of payment terms and to negotiate them to provide better value. If the supplier offers a discount for paying within a certain timeframe, it is advisable to pay the invoice early. If the supplier does not, however, it is best to wait until the end of the invoice term and hold onto the cash.

It is also sometimes possible to negotiate more favorable terms with suppliers, either for a discount for early payment or longer payment terms. However, longer terms may strain relationships with suppliers, so this should be considered carefully and not overused. It could lead to higher prices (to compensate for the longer wait for payment), or even to a company no longer wanting to do business.

These are just a few of the ways that procurement can make an impact on cash flow. Effective inventory management and strong supplier relations can contribute significantly to an organization’s success. Solid procurement intelligence solutions and comprehensive analytics can identify many ways to save money and optimize cash flow and are an important part of a successful business.

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