Cash flow is the silent killer of businesses and never more so than in the current economic climate. There is rarely a week when the business pages tell of another story of a small or large business that is struggling to access suitable lines of credit. In the UK yesterday was the ‘quarter day’ when lessees, large and small, have to pay in advance for their next quarter’s rent. Not unsurprisingly there were a number of prophetic articles raising the spectre of failures.
We often focus on the banks and financial institutions as the key players in the supply of funding, however, if cash is the lifeblood blood of the business ecosystem then, whilst supply of cash is important, the efficient flow of it is equally critical to ensure that all parts of the ecosystem are suitably supplied.
In this respect we often overlook the importance and implications of trade credit. For example, if you look at the accounts of major retailers, then you will probably find that trade credit is a significant source of funding. In good times what we experience is a well-balanced system which has enough surplus/slack in it to accommodate anomalies in the system. What we are increasingly seeing is the relative importance of trade credit as a source of funding to companies as other sources tighten with buyers trying to extend payment terms and suppliers trying to tighten them. This increased tension in the system is a real risk to particularly smaller companies with the outcomes driven by relative power in the relationship rather than business logic.
Whilst some of the larger organisations have created sophisticated approaches to credit management, most organisations have a one size fits all approach and a relatively primitive strategy which may have worked fine in times of growth is not best suited today.
The enlightened organisations that I see are increasingly seeing trade credit as a way of creating strength and resilience in their supply networks and trading this for advantage elsewhere. By balancing the C-level demands to meet the next quarter’s numbers with the longer term requirements to create, nurture and develop a resilient and robust supply network these companies are better protecting the shareholder’s interests.
To achieve this balance the successful companies have developed and deployed mindsets, skillsets and toolsets that treat credit management as a proactive business tool. In doing this they leverage approaches that you’d most likely see in a fund manager reviewing terms at the individual and portfolio levels. As come out of the current economic downturn these companies will be more likely to be surrounded by robust, innovative supply chains which will give them competitive advantage.