How Procurement Can Drive Cash Flow Strategy and Optimize Working Capital

Geopolitical conflicts, supply chain disruptions and prevailing uncertainty in the global economic environment have caused a significant shift in business priorities.

As businesses look to navigate this period, they must take steps to identify and mitigate risks as well as improve their overall financial health.

At the same time, they also need a robust cash flow strategy to stay prepared for a downturn.

How can businesses optimize their cash flows and working capital? Where can they cut down on costs?

To begin with, they need to streamline workflows and drive greater collaboration between different internal teams. Procurement and finance teams, which often find themselves in conflict over delayed payments, unpaid invoices or mismatched purchase orders, have to jointly play a vital role in this endeavor.

Collaboration between these two teams is crucial not only for preserving cash flows and optimizing working capital but also for streamlining the procure-to-pay cycle.

On the other hand, misalignment between these teams hurts relationships with suppliers who often have to chase different internal teams to get their payments. When this happens, members on both teams indulge in a blame game.

This also eliminates any chance of early payment discounts and savings opportunities.

Neither of these teams is responsible for this situation. After all, procurement wants to ensure timely payments to strengthen supplier relationships. And finance has to follow a set protocol to validate a payment.

There are simple ways to fix these issues and make life easy for staffers on both teams as well as external stakeholders.

Need for Procurement and Finance to Work Closely

Involving procurement in working capital management is key, given its regular association with suppliers and comprehensive understanding of third-party spend. In fact, effective management of working capital requires close coordination between procurement and finance teams across different stages in the source-to-pay cycle.

Procurement can leverage its relationships with existing suppliers as well as negotiation skills to optimize working capital.

Here are a few ways it can succeed in this initiative:

1. Optimize payment terms:

Procurement can start off by looking into existing payment arrangements with suppliers. Negotiating longer payment terms with suppliers is one of the best ways to improve flexibility and increase working capital.

For example, extending payment terms from 30 days to 60 days can provide much-needed leverage. As part of this process, procurement must first identify suppliers where negotiating payment terms can provide the desired impact. It should also emphasize mutual benefits, such as larger order volumes, to convince suppliers.

2. Trade cash advances with stressed suppliers:

During a downturn, many suppliers are likely to face a cash crunch. Procurement can identify suppliers who are low on cash reserves and help them stay viable with cash advances. In return, it can ask for future price reductions and create an opportunity to optimize working capital in the long term.

3. Tighten inventory management:

Holding more inventory than required to effectively meet demand blocks a major part of working capital. Therefore, procurement must adopt an approach to maintain optimum inventory. It should leverage predictive analytics to accurately forecast demand. It also needs to track inventory across different locations in real time.

4. Get involved in budgeting:

Procurement establishes budget controls in the procurement process to prevent budget overruns. A better approach for procurement is to get involved at an earlier stage in budgeting. This can link the end-to-end process, starting from budgeting all the way through invoicing and payment. Budget-to-pay (B2P) aligns finance master data with procurement data, thereby connecting disparate data sets and putting organizational data from multiple systems and functions into perspective. With a B2P solution, a business can track every purchasing request against budget lines and differentiate between good and bad costs.

In addition to the above strategies, procurement should work with suppliers on an ongoing basis to identify opportunities to optimize processes. Fostering a culture of innovation and process improvement can reap benefits in the long term and help lower costs.

Additionally, procurement should take steps to tighten internal procedures to improve contract compliance. This can help check off-contract purchases and lower tail spend, which often accounts for a significant portion of overall spend.

The Takeaway

By utilizing its negotiation strategies and strong relationships with vendors, procurement can play a key role in optimizing cash flows. In this endeavor, it needs to work closely with finance and other internal stakeholders.

Additionally, when dealing with paper invoices and manual processing, procurement and finance teams cannot achieve the desired level of coordination.

As a result, there is a lot of back and forth, which leads to delays in approvals and payment.

Businesses need to digitize accounts payable and get rid of all that paperwork, data entry and manual invoice processing. With automated routing, reviews and approvals, AP automation eliminates the need for manual intervention, increases accuracy and reduces operating costs and invoice processing cycle times.

Learn how GEP’s AP Automation solution can help your business meet the requirements of internal and external stakeholders and optimize working capital.