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Financial Supply ChainThe Ultimate Guide of 2023

The financial supply chain is new to many procurement professionals, especially those who have just started their journey in the procurement and supply chain industry. 

For this article, we will tackle what a financial supply chain is. We will tell you how it works and how you can manage it. Additionally, we will discuss the three processes of financial supply chain management.

After reading this article, you will be able to grasp fully what a financial supply chain is. Thus, it will enable you to streamline your supply chain effectively. So now let us dive into the financial supply chain. 

Whatis the Financial Supply Chain?

Financial supply chain or supply chain finance describes a set of technology-based solutions that helps lower financing costs and enhance the business experience for sellers and buyers connected in sales transactions. 

It optimizes the cash flow that enables the business to lengthen its payment terms to its suppliers while providing an option for when a supplier will be paid. To simplify, it refers to monetary transactions between trading partners for purchasing, manufacturing, and selling goods and services. 

The financial supply chain automates transactions and tracks invoice approval and settlement processes from initiation to completion. It offers various advantages to all parties. While suppliers can gain quick access to money the buyer owes them, the latter can get more time to pay their balances. Thus, it is a win-win situation for both parties. 

The financial supply chain is crucial for every company as it delivers the cash flow required to keep the operations running and employees paid. 

HowDoes it Work?

The financial supply chain works best when the buyer has a better credit score than the seller. The buyer can also source capital from banks or other financial providers at a lower cost or interest. 

Thus, this advantage allows buyers to negotiate better terms from the suppliers such as the extension of payment schedules. On the other hand, sellers can unload their products more quickly in order to receive payment immediately. 

Supply chain finance fosters collaboration between buyers and sellers. After all, in traditional ways, buyers tend to delay payment while sellers demand to be paid as soon as possible. 

Whatis Financial Supply Chain Management?

Financial supply chain management (FCSM) is the approach of considering the company’s financial processes as a whole rather than as individual processes. This approach involves the procure-to-pay cycle, order-to-cash cycle, and working capital management. 

It uses software tools and processes designed to improve the product flow and profitability of a company as well as minimize its expenses. The purpose of financial supply chain management is to achieve and maintain visibility into all of the processes. 

Thus, it allows the company’s supply chain to be efficient as possible while capitalizing on cost savings


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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.

Frequentlyasked questions

+ What is the financial supply chain?

It describes a set of technology-based solutions that helps lower financing costs and enhance the business experience for sellers and buyers connected in sales transactions.

+ What is financial supply chain management?

It is the approach of considering the company’s financial processes as a whole rather than as individual processes.

+ Why is financial supply chain management important?

It is important as many procurement professionals appreciate the connection between supplier relationship management and cash management. 


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