Small businesses understand the importance of managing their physical supply chains, including the sourcing and tracking of raw materials and parts, and shipping finished goods to customers. But what about the supply chain of cash that’s flowing out of and into your business’s bank accounts? By examining the financial supply chain, you can look for opportunities obtain discounts in exchange for early payment, as well as extend payment terms with suppliers. The following are four ways to help maximize your financial supply chain and in turn enable you to improve your working capital management:
- Cloud-based Dynamic Discounting - Think of this as part stock market/part eBay for accounts payable. For small businesses with excess cash and a large number of approved invoices payable at standard terms, Dynamic Discounting may be advantageous. Using this approach, suppliers are invited to participate in a fully automated online marketplace where they bid against other suppliers to take advantage of a buyers offer to pay earlier in exchange for a discount. The offer is only available until a set amount of cash is exhausted. At the end of the day, the small business accepts the discounted invoices the company wants to pay and the winning suppliers are notified. Suppliers get their payments early, boosting their cash flow, and you pay less than the agreed upon price for the goods or services the supplier provided.
- Commercial card programs - Another way to drive up your company’s liquidity, while ensuring that your supply chain stays healthy, is to enable your suppliers to accept discounted early payments on their approved invoices via credit card transactions. For example, a supplier accepts a discounted credit card payment on day 20 of a net-30 transaction, getting cash earlier than expected. Your credit card account is charged on day 20 and the supplier gets paid right away, but the cash does not leave your account until days later because your credit card bill does not come due immediately.
- Supply chain finance- This tool is similar to dynamic discounting, but instead of using your liquidity, a bank lends its liquidity to certain discounted transactions. In this case, it’s the bank that pays strategic invoices early, acting as a middle man in the payment transaction. The bank earns the difference between the discounted amount it paid out early and the full payment you made 25 days later. This tool is typically used on large, high-value payments.
- Payment networks - For businesses with a lot of small suppliers, it may not be financially feasible for them to participate in dynamic discounting or other financial supply chain management programs. What they can do is have their bank push their approved invoices into a specialized supplier payment network. For instance, some small suppliers participate in networks that allow them to get access to cash early and that deal in electronic remittances, so they can post the payments directly to their books and recognize the revenue immediately, rather than waiting days to receive and deposit paper checks. Fifth Third Bank can handle these transactions for clients, substantially reducing their overhead and time spent on hands-on management of large numbers of payments to smaller suppliers.
Fifth Third Bank can work with you to implement the right financial supply chain strategy to lower your cost of goods sold and boost your balance sheet.