In order to compete, businesses are forced to find a balance between producing competitive products and services, and managing costs. Businesses that fail to keep costs low can’t maintain competitive prices, but those who cut costs too aggressively can’t compete on quality. The most successful businesses are those that can work most efficiently, getting the most out of every dollar invested. That means not just slashing budgets to reduce overhead, but strategically finding ways to manage costs that don’t affect the business’ ability to perform.
A great way to do this is by offsetting financial risk for business partners. Fifo Capital’s supply chain finance allows businesses to guarantee timely, and even early payment to suppliers. This helps to stabilise supplier revenues, providing value through sheer reliability. In this way, businesses can leverage their supply chain finance facility to not only perform its primary purpose of improving the business’ working capital position—but also to reduce overall supply costs.
Cutting costs is a big deal for growing businesses
As businesses grow larger, cost management becomes increasingly important. This is because the total amount of working capital that can be freed up becomes more significant as enterprises get larger. Tweaking a production process to save a few cents per unit might add up to a few thousand dollars per year for a small business. That is significant, but it doesn’t compare to what a much larger competitor could do with the million it saved from the exact same change. The larger business could use the funds saved to significantly boost research and development, or sales and marketing, gaining an important competitive advantage.
Many well-established industries already have well-known best practices designed to optimise costs, leaving few obvious improvements for innovators to make. Supply chain finance, however, gives businesses a way to reduce costs without attacking their processes or cutting corners.
How supply chain finance works
Supply chain finance works by the financier paying the customer’s suppliers when invoices are due without the need for the customer to dip into their current working capital. This allows the customer to pay the financier up to 90 days later. This helps businesses to more easily deal with cash flow interruptions, and to extend their payment terms to reduce their cash conversion cycle. Fifo Capital, however, went a step further, by creating a mechanism through which businesses could pay their suppliers early, before their invoices came due.
Discounting supplier invoices
Regardless of their location or industry, suppliers deal with the same cash flow difficulties as their customers. Fifo Capital’s supply chain finance allows businesses to use their credit fund as a way to negotiate for reduced supply costs. Specifically, suppliers can request early payment on an outstanding invoice, in exchange for a discount on that payment. If the business agrees, the reduced payment amount is released. This way, the business issuing the payment can finance an early payment to get a discount, without actually being forced to pay early. After all, the balance on the fund can still be paid off up to 90 days later, keeping working capital protected.
Negotiating for better payment terms
While early payment is a great way to reduce costs with suppliers who are dealing with a cash flow issue, supply chain finance also gives businesses the tools to secure more general savings. The vast majority of Australian businesses, particularly those working with significantly larger clients, operate with the expectation that client invoices will be paid 10 or more days late. This is not only inefficient, it creates significant financial risk for them. By using supply chain finance, businesses can guarantee that payments can always be made on time, or even early.
Businesses who can approach potential or current suppliers with a guarantee that they will be able to pay on time reliably, and perhaps even mitigate some of the financial risk they face with their other clients, become very desirable. This gives them the leverage they need to negotiate for more favorable terms, whether that means longer payment terms, reduced pricing, or both.
As businesses scale up their operations, even relatively small changes in supply costs can make a big difference. By reducing their marginal supply costs, they can free up working capital proportionally to the business’ current production volume, giving them the funds they need to pursue new growth opportunities, to fund research and development, and to attract and retain the best talent in their industry.