With the current supply chain disruption experienced around the world, it has no doubt driven cost of materials higher whilst inventory and logistic delivery times have stretched out way longer than any of our customers would have liked. Given that the supply chain disruption is expected to continue well into 2022, how best can you manage all the cost and delay impacts to your business?
What are the impacts?
First and foremost, let us take a look at how this supply chain disruption impacts on your business.
Bottom line and Revenue
As costs goes up, and with all things equal, business profit is inversely related and therefore goes down. Your business certainly has the option to pass cost increases to your customers. Based on a study in the UK, 79% of surveyed businesses experienced increased supplier prices. 40% of them decided to absorb the entire cost increase themselves to stay competitive. 27% absorbed most of the costs and 33% passed the costs to the customer entirely.
For those businesses that decided to pass on some and all costs, two thirds of these businesses saw a reduction in orders.
Longer lead times and larger inventory levels
During times of supply chain disruption, orders must be placed much earlier than usual with uncertainty as to when orders will eventually arrive. Many businesses were forced to order in larger quantities and increase the level of inventory held which in turn helps minimise potential stock shortages. However, these forced practices further fuel higher costs in running the business.
Slowdown in innovation
As businesses try to control operational expenses, many Research and Development projects will be invariably put on hold. Forecasted additional revenues as part of a new product line launch will also be pushed out into the future. This will have an impact on cash flow as expected revenues are now delayed.
So, what does all this mean to my business?
Businesses are forced to make many tough decisions right now. All the impacts described above results in lower profit margins. So, what are the actions your business should take now?
Reduce or eliminate expenses
Analyse your expenses and start removing expense items, where possible. If it is not possible to eliminate, reduce or postpone some expenses to a later date. Analyse larger ticket items first to get the most impact to your bottom line. You may also need to start looking at more cost competitive suppliers to obtain better pricing and lower the cost of your purchases.
Strengthen cash flow
Cash is king and will always be. The ability to optimise cash flow is so crucial right now to ensure your business not only survives but continues to thrive. Stronger cash flow not only allows you to meet all business expenses but offers your business an invaluable tool to better negotiate pricing with your suppliers, or take advantage of early payment discounts offered by your suppliers by paying them earlier.
On the other hand, if you find yourself having to wait to get paid by your customers, check out invoice financing. It is a fantastic funding facility that allows your business to obtain immediate payment upfront on your outstanding invoices, rather than wait 30, 60 or even 90 days to get paid by your customer.