Financial Supply Chain— The Ultimate Guide of 2023

The Importanceof Financial Supply Chain Management

In the past, cash management was not considered part of purchasing and physical supply chain management. However, as time passes by and new technologies are made, professionals are now embracing the entire process and appreciating the connection between supplier relationship management and cash management. 

Insurance, finance, and transaction costs usually account for about 5% of the cost of the unit’s pricing. Hence, companies must strengthen their management of the entire supply chain. Therefore, two components lead to an open environment for financial supply chain management in businesses.

The first component is improving network technology. When this happens, it results in more visibility throughout the physical supply chain. The second component is an in-depth awareness of the end-to-end processes and collaboration in the company. 

The Processesof Financial Supply Chain Management

1. Procure-to-pay cycle

The procure-to-pay cycle, also known as the P2P cycle, is a trade cycle seen from the point of view of a business that purchases materials, products, or services. 

During the P2P process, the business selects, receives, and pays for the items needed to produce the goods or services they supply to their customers.

2. Order-to-cash cycle

The order-to-cash cycle, also known as the O2C cycle, is the trade cycle seen from the point of view of the company that is supplying or producing the materials, products, or services. 

The O2C cycle starts when the supplier provides the quote for their customer. It ends once the payment has been received and the invoice is analyzed. The key area in this cycle is the accounts receivable from a financial perspective. 

After the issuance of the invoice, the finance department must collect the payments in the most effective and efficient manner to avoid payment delays.

3. Working capital management

This area of the finance supply chain is tricky for many businesses. However, it is crucial to manage it to keep the operations running smoothly and ensure everyone has all the things that they need for their job. 

Every business must have a specific amount of working capital to use to order materials and services needed to continue their operations while they wait for their outstanding invoices to be completely paid. 

Working capital needs to have a delicate balance. If you do not have enough products in your inventory to sell to your customers, then you will spend more money to manufacture the products that you are selling. 

However, if there are too many unpaid invoices from customers, you may not have enough capital to continue ordering the materials you need to manufacture the product for your customers. 

Working capital management is an accounting strategy used to balance current assets and liabilities. Thus, ensuring companies remain financially efficient as it maintains their cash flow to meet short-term operating costs. 

Additionally, it involves balancing the inventory management of a company with accounts payable outstanding and accounts receivable. You must not have too much capital tied up to your inventory. At the same time, you must ensure that your inventory is enough to meet the demands of your customers.

Working capital management decreases the amount of time required to convert assets and liabilities to cash when handled well. It also helps in improving the profitability of a company.