Supply Chain Management and A/P Impact

Supply Chain Impact on Accounts Payable (A/P)

• Negotiated Payment Terms: Payment agreements can influence cash flow and relationships with suppliers.
• Rising Labour Costs: Increased labour costs may lead businesses to delay payments, risking supplier relationships and increasing the need for working capital.
• Manufacturing Costs: Similar financial strains as labour costs can result from heightened manufacturing expenses impacting payment timelines.
• Sales Growth: Linked to accounts receivable; sales growth affects cash flow and payment terms with suppliers.
• Float Management: Crucial for cash collection; involves minimizing delays between customer payments and cash availability.
• Settlement Delays: Any delays in supply chain processes delay payment settlements, raising costs and harming goodwill.

Working Capital and Cash Flow

• Tight Working Capital Availability: Poor collection practices lead to inventory stagnation, increased expenses, and potential cash crunches necessitating borrowing.
• Increased Borrowing Costs: Cash tied up in accounts receivable and inventory leads to opportunity costs and higher interest payments.
• Cash Flow Improvement: Efficient supply chain processes can convert current assets into cash, thereby reducing costs and increasing available cash flow.

Cash Conversion Cycle (C2C)

• Definition: C2C measures the time taken to convert cash spent into cash received.
• C2C Calculation Formula: C2C = A/R Days on Hand + Inventory Days on Hand - A/P Days on Hand.
• Example Calculation: A/R DOH = 45 days, Inventory DOH = 60 days, A/P DOH = 30 days, resulting in C2C = 75 days.

Accounts Receivable Days on Hand (A/R DOH)

• Purpose: Indicates how much A/R supports sales. Ideally, A/R growth should match sales growth proportionally.
• Formula for A/R DOH:
  • First Formula: A/R DOH = (Average A/R / Sales) * 365.
  • Second Formula: A/R DOH = 365 / Receivables Turnover (Receivables Turnover = Sales / Average A/R).
• Example Calculation: For sales of 1,000 and average A/R of 200, both formulas yield A/R DOH = 73 days.

Inventory Days on Hand (Inv DOH)

• Definition: Reflects the amount of inventory available to support daily sales, using cost of goods sold for accuracy.
• Management Goal: Keep sufficient inventory to support sales without overstocking.

Analyzing Changes in A/R Year Over Year (YOY)

• Sales Growth Impact: Calculate the percentage change in sales YOY to assess A/R changes.
• A/R Growth from Sales Change: Use sales growth percentage to gauge impact on A/R.
• Daily Sales Calculation: Annual sales divided by 365 provides daily sales figures.

Financing Options for Businesses

• Factoring: Selling receivables at a discount for immediate cash flow, but at a high cost of financing (30-40%).
• Asset-Based Lending: Financing using A/R and inventory as collateral while retaining possession of the assets.
• Inventory Loans: Short-term loans for purchasing or producing inventory when funds are insufficient.
• Supply Chain Finance: Also known as reverse factoring; banks finance confirmed receivables between buyers and suppliers.

Credit Policies and Collection Management

• Credit Assessment: Use the five C's of credit (Character, Capacity, Capital, Conditions, and Collateral) to evaluate creditworthiness.
• Monitoring A/R: Regularly administer collection policies and customer assessments to minimize default risks.
• Data Sources for Credit Information: Utilize agencies like Dun & Bradstreet, Equifax, Experian, and TransUnion for customer evaluation.

Conclusion

• Supply Chain Management: Effective management enhances cash flow through improved C2C and reduced costs.
• Proactive Financial Planning: Awareness of financing options and potential issues essential for minimizing costs in supply chain operations.

This quiz explores how various supply chain activities affect accounts payable (A/P). It includes insights on negotiated payment terms and the implications of rising labor costs on supplier relationships and working capital. Understanding these factors is crucial for effective supply chain management and financial stability.