The Great Balancing Act: How to navigate supply chain risk and maintain liquidity

By Simon Beck, Senior Director, ANZ at C2FO

Global enterprises face two significant challenges in the current economic climate. First, businesses must maintain liquidity to ensure that they have the cash flow needed for daily operations and growth. Second, they need to maintain a robust supply chain to meet customer demands. But achieving both at the same time requires a delicate balancing act.

In this post, we’ll take a closer look at each of these challenges and three approaches to balancing the two.

Enterprises are facing increased liquidity pressures

Liquidity is a key indicator of a business’s financial health. Sufficient liquidity and cash flow are needed to cover expenses, meet growth targets, satisfy investor expectations and maintain stock prices. However, current economic factors are putting additional pressure on businesses to maintain as much liquidity as possible.

Enterprises need to maintain liquidity to navigate supply chain risks — but reducing supply chain risks necessitates the use of precious liquidity.

Inflation, for one, is not only raising overhead costs but also prompting banks to increase interest rates and limit businesses’ access to credit. The situation is exacerbated by pandemic recovery, natural disasters, resource and labor shortages, and geopolitical instability, all of which can further reduce cash flow and the availability of liquid assets. Even with sufficient cash flow, enterprises concerned about a recession might want to make liquidity improvements to protect the business against the risks associated with economic uncertainty.

Supplier relationships are a high priority

Supply chains are a second source of significant risk. Global enterprises manage highly complex supply chains that function less like chains and more like multilayered networks. Supply chain research has shown that semiconductor chips, for example, go through 3.2 intermediary suppliers on average before reaching customers — in this case, automakers. What’s more, researchers found that automakers only account for 5% of chip customers. The remaining 95% of supply chain pathways cross a variety of other industries, such as consumer electronics.

Why does this matter? If your business creates physical products, it most likely requires an expansive supplier network with supply chains that overlap different industries — making it more vulnerable to disruptions, even ones that occur outside your sector.

This is why supply chain relationship management (SRM) is a growing concern for leading enterprises, with 3 out of 5 companies prioritizing supplier engagement and collaboration as a way to counter disruptions. In fact, strong supplier relationships are now as important as maintaining liquidity for global businesses. They help:

• Increase supplier loyalty and long-term strategic relationships.
• Provide access to supplier-driven innovations.
• Ensure goods are delivered on time and in full.
• Improve supply chain resilience.
• Support collaborative problem-solving in the face of disruptions.
• Save costs and improve efficiency.

Mastering the balancing act: Three approaches for success

Many buyers respond to liquidity pressures by extending invoice payment terms with their suppliers. At the same time, suppliers seek shorter terms to address their own liquidity needs. This puts buyers in a bind: Paying suppliers quickly gives suppliers the cash they need to operate but puts the buyer’s own liquidity at higher risk.

If this sounds familiar, your business may be performing a delicate balancing act between reducing supply chain risks and maintaining liquidity. Preserving this balance is especially crucial if you rely heavily on suppliers — for example, if you manage design, marketing and sales in-house but use external suppliers exclusively for manufacturing.

The main challenge here is maintaining your liquidity while ensuring that your suppliers have the cash flow needed to deliver goods reliably. Here are three ways to manage both.

1. Segment suppliers and negotiate payment terms strategically

The first step is to identify your key suppliers. These include strategic suppliers that are both critical to your business and have the highest impact on your margins. Bottleneck suppliers are also important, offering niche goods or services that your business can’t function without. Separate these suppliers from your leverage suppliers (those that are crucial but easy to replace) and noncritical suppliers (those with the smallest impact on your margins and operations).

Segmenting suppliers illuminates where you can negotiate payment terms in your favor without impacting business continuity or profits. If the goal is to improve liquidity, negotiating longer payment terms will delay accounts payable and allow you to hold on to working capital longer. Use this strategy with noncritical or leverage suppliers, which occupy the more saturated and less vulnerable areas of your supply chain.

Be more cautious about using this approach with strategic and bottleneck suppliers, however. Because these suppliers are crucial to your business, you should prioritize these relationships and find alternative ways to fund shorter payment terms and support their cash flow needs. Otherwise, these key suppliers may be left without the cash flow needed to meet demand, which could backfire by disrupting your supply chain.

2. Use early payment solutions to reduce supply chain risk

Limited access to cash puts buyers and suppliers under increased pressure to find cash flow solutions outside of traditional sources such as banks. Early payment solutions are valuable for preserving liquidity while maintaining strong relationships with your strategic suppliers — those that have more negotiating power and need to be paid promptly to avoid disruptions. Modern solutions typically fall within one of two categories:

• Early payment programs. These buyer-initiated programs make it easy for you to pay suppliers early in exchange for a discount. This improves supplier cash flow, strengthening the supply chain. The discount also reduces your cost of goods sold (COGS) and improves other financial metrics such as EBITDA.
• Supply chain financing (SCF). SCF programs use a third-party lender to fund early supplier payments on your behalf. This form of financing gives suppliers a cost-effective way to fund cash flow and strengthens the supply chain while preserving your working capital.

“The HPE C2FO Early Payment Program provided us with quick, simple access to working capital. It is a flexible tool to manage during both times of certainty and volatility.”
– Strategic supplier for Hewlett Packard Enterprise, which funds early payments via C2FO’s Dynamic Supplier Finance platform

3. Implement a Dynamic Supplier Finance program

Early payment programs typically require you to fund early payments from your balance sheet. However, this isn’t always ideal if your goal is to maintain liquidity. On the other hand, traditional SCF programs have their own drawbacks, with low supplier participation common due to complex onboarding processes, restrictive agreements and cost barriers.

Thankfully, there’s a more effective way to meet your liquidity requirements while supporting suppliers: C2FO’s Dynamic Supplier Finance (DSF).

Dynamic Supplier Finance is an online platform that suppliers can use to easily request early invoice payments in exchange for a buyer discount. But unlike other programs, DSF lets buyers like you flexibly fund early payments yourself or through a network of third-party lenders — whichever makes the most sense for your liquidity needs at the time. This approach has several benefits:

Strengthens the supply chain and reduces the risk of disruptions by giving your suppliers cost-effective working capital access. This supports suppliers with otherwise limited funding options.

• Segments your supplier base so you can better track and optimize spending on large and strategic suppliers.
• Leverages invoice discounts to improve your margins and other financial metrics.
• Provides greater flexibility, with the ability to choose when to fund early payments yourself, so you can get risk-free returns on idle cash.
• Gives suppliers incentives that you can use to negotiate favorable terms in the future.

The bottom line on supply chain risk vs. liquidity

Global businesses are operating in an environment of growing supply chain complexity and economic uncertainty. This points to a catch-22 — enterprises need to maintain liquidity to navigate supply chain risks, but reducing supply chain risks necessitates the use of precious liquidity. In other words, businesses are caught between preserving cash flow and ensuring the stability of their supply chains and supplier relationships.

Thankfully, emerging fintech solutions such as C2FO’s Dynamic Supplier Finance are making it possible to balance both. The approach is twofold: A user-friendly platform makes it easy for you to fund early supplier payments, while dynamic financing gives you the flexibility to decide how to fund these payments, on demand.