When we think about credit management, it’s easy to get focused on the day-to-day operations of sending invoices and collecting payments. It can be hard to see the forest through the trees, so to speak.
But if the recession of 2008 taught credit managers and business owners anything, it’s that they need to be prepared for large market shifts. We can’t assume things will stay the same — and we definitely can’t assume we will have advance notice of a big change.
To ensure your company survives and thrives, regardless of how the market moves, it’s necessary to have a deeper understanding of your entire financial supply chain.
So, what is the financial supply chain?
In a nutshell, it’s the big picture — the chain of purchases and payments that connects trading partners all the way from order placement to cash paid for goods and services. Purchase orders come in the door while goods and services go out. Money comes in from sales and goes out to pay supplies and employees. This process works in reverse in the case of a return.
A healthy financial supply chain enables sustainable cash flow in your business. Both the order-to-cash cycle and procure-to-pay cycle are essential parts of the financial supply chain. Understanding where the money is coming from (order to cash), where it’s going (procure to pay), and in what order helps you keep tabs on the larger financial picture.
If you’re already deep in the daily details of credit and cash flow, why should you care about the higher-level view? Isn’t it enough to know you have cash coming in? Well, in this day and age, not really.
Company owners and managers today understand that showing a profit at the end of the year isn’t the only goal. It’s just as important to maintain an overall healthy flow of cash that enables you to operate your business smoothly and grow it in a sustainable way.
Having a healthy financial supply chain for your business can help ensure
- risk is under control;
- you have the means to deliver goods and services to your customers;
- you can fulfill obligations to suppliers, employees, and others in your chain;
- the business can withstand a financial crisis or shift in the marketplace; and
- business owners and managers have a real understanding of the whole picture, not just the day to day.
When you take the time to study your whole financial supply chain, you will be able to make decisions in the best interest of your long-term stability — regardless of market shifts and upsets.
Understanding your full financial supply chain is essential for credit portfolio management — and for reducing risk to your whole business. So remember to look up sometimes and see the whole forest.