Tech firms need strong cash flow management skills to thrive. While these kinds of manufacturers are seen in the popular imagination as overflowing with cash, the reality is that they face the same financial pressures as other businesses, plus a number of other potential complications. Not only do they rely on long international supply chains, but they also occasionally face astronomical costs without any prior warning.
By using supply chain finance, tech firms can reduce the impact of these kinds of cash flow interruptions. Additionally, it allows them to stabilise the cash flow of their suppliers, which helps them to secure the consistent quality and supply costs they need to budget effectively and to pursue growth in the long term.
Cash flow interruptions can be massive
Building electronics requires expensive equipment and facilities, and the materials and products they work with are incredibly valuable themselves. If any equipment breaks down or malfunctions, manufacturers are forced to absorb the cost of repairing or replacing the equipment, as well as any defective products.
The manufacturing process is typically monitored rigorously to minimise the scope of the effects of any production issues, but even then repairs and losses for a single equipment malfunction can easily rise into the millions. Tech companies need to be prepared to absorb these kinds of costs at a moment’s notice. While they generally earn enough in any given year to cover emergency costs, they can’t afford to sit on a massive emergency fund any more than any other business. In order to compete in the long term, available capital needs to constantly be invested in research and development to drive growth and drawn away to manage emergencies when needed. That means when a cash flow interruption strikes, that capital isn’t readily available.
Tech manufacturers need to avoid supply instabilities
A common tactic when dealing with a cash flow interruption is simply to delay outgoing payments. Suppliers won’t be able to immediately pursue a late payment, which is often enough time for the business to redirect those funds to manage their more urgent needs, before applying incoming revenues to pay supply costs later.
For most businesses, this is a risky manoeuvre. Suppliers rely on steady payment to operate effectively, and delayed payments can impact their ability to do good work. Eventually, this can lead to reduced quality, delayed shipments of supplies, and even the loss of a supplier.
For tech manufacturers, the risk is significantly higher. Many of these types of businesses rely on complex supply chains that reach all the way around the globe. If a supplier goes under or refuses to work with the business, there might simply not be a practical competitor to switch to. Even if a shipment is just temporarily delayed, it might force production to slow or halt altogether. Those operational interruptions, for their part, can quickly become even more expensive than any initial equipment issue.
Supply chain finance ensures steady payment while freeing up funds
In order to operate smoothly enough to succeed in the long term, tech manufacturers need to be able to pay suppliers on time, while also absorbing unexpected costs at a moment’s notice. Supply chain finance is the ideal tool to accomplish this.
Rather than paying suppliers out of their own funds, businesses can use a separate credit fund to issue payments instead. That done, the available working capital can be safely redirected to manage a cash flow interruption, without risking late payment to any suppliers. Unlike the business’ suppliers, the financial institution offering the financing can wait to receive payment. Specifically, the balance on the fund can be deferred by up to 90 days (or longer in select cases), giving the business plenty of time to collect revenues or make other arrangements.
Paying early to stabilise suppliers and reduce costs
Suppliers, like any other business, often run into their own cash flow difficulties. A company that uses supply chain finance can take that opportunity to offer a supplier a helping hand with an early payment—at a price. By issuing an early payment, the business can negotiate for a discount, bringing down supply costs while helping the supplier out of a sticky situation.
Supply chain finance fundamentally helps businesses to better manage their cash flow, while creating more stable supplier relationships and keeping costs down. By giving them the resources they need to deal with short term financial issues, they can better plan for and move into the future to build long term financial stability.
LinkedIN