• Posted on: October 4, 2013 by: CashPerform

    Financial versus physical supply chain a new accounting process

    The financial supply chain is often referred to as being the process of managing the efficiency and effectiveness of the whole working capital ecosystem.

    However the introduction of CAPEX into the working capital equation namely DSO+DIO-DPO as well as the terminology being applied by the newly published FRS102 re debtors are classified as receivables and creditors as payables now requires a new accounting process to be established as more working capital funding aspects are involved.

    There is also a whole new investment strategy being played out by corporates that impact SME’s namely supply chain finance programs like dynamic discounting and furthermore there is the intervention strategies being developed by major players like Sovereign Wealth, Pension Funds as well as the likes of MasterCard and PayPal that can leverage payment platforms to supply working capital funding.

    Add to this the threat to the main banks from the likes of Basel III re capital adequacy tests and the banks lack of focus as to whether to deliver commercial/mortgage type funds to you rather than to support riskier business ventures with their greatly reduced capital funds.

    I therefore propose that the new financial supply chain is renamed as the financial supply process which links the whole working capital and capex chain to the funding requirements of the business.

     

    If we take receivables the process is from the point of identifying a market, thru sales, thru delivery, customer satisfaction to invoice processing, receipt of cash, posting and reconciliation to all accounts.

    The physical supply chain for receivables is the usual Order to Cash process that sits within the credit control and accounting function in most businesses and is where debtors are part of the physical collection system

    If we take payables the financial supply process would embrace the approval of suppliers via procurement following a strategy that reflected and followed the strategy accomplished by marketing and sales in the pursuit of their targets (including stock and work in progress) plus the businesses capex strategy. These suppliers would eventually become creditors and would be subject to payment in accordance with their individual terms and conditions which themselves would be aligned to funding streams namely operational cash plus short/long term working capital funding streams.

    The business itself would be driven by working capital/capex models that reflect the mix of products, projects and service areas within the business. The strategy being the development of the cash rich areas (current as well as envisaged ) to satisfy stakeholders interests namely creditors, employees, investors, and including future options regarding growth like merger and/or acquisition or disposal.

    Cash conversion cycles are critical as they provide views on liquidity as well as optionality with regard to strategy. The Boston Consulting Group Matrix re Cash reflected such matters in the 1970’s

     

    A top level example of cash flows and working capital cycles are on a  separate power-point presentation that can be provided upon request.

    Please note the project cycle applies to contract projects in sectors like construction as well as for internal Capex projects and can be applied to marketing, research and development expenditures as they could have projects as defined strands to meet certain strategic goals. For instance market penetration into a new geographical area like Europe could have specified cost, sales and capex criteria within a milestone driven project.

    Finally we need to address the reporting of the new financial supply process. With integrated reporting, future statutory requirements and the need for transparency and good governance around cash re going concern concept the new process identifies the whole cash chain ‘cradle (cash inception) through to grave (cash collection and reconciliation).

    The new financial supply process will map the processes and within its structure highlight the ‘physical touch points’ like invoice raising and invoice receipt as well as map it through to the funding requirements of the business.

    The business can then establish whether it will require short term or longer term funding, or whether it can pay dividends, afford share buy backs, afford M & A, afford pension fund contributions etc.  or a mixture of all these to achieve the strategy.

    ©Copyright John Mardle CashPerform Ltd October 2013

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