Supply chain and Finance are two topics that are interrelated and are dependent on each other. Where supply chain refers to all the processes that help a company provide its products and services to the customers, finance refers to all the monetary transactions carried out within a company. Since most of the finance sector of a company is dependent on its customers and the outreach, the company’s supply chain plays a very crucial role in performance and revenue. In the United States, supply chain operations account for around ten percent of GDP, which is almost $1 trillion. Financial Supply chain management is a sector that deals with both supply chain management and financial management and considers both of the processes as a whole instead of viewing them as individual processes. Here in this article, we will be discussing Financial Supply chain management in a more defined manner, covering most of the topics which a beginner should know.
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FSCM or Financial Supply Chain Management refers to the process of combining the individual fields of Finance and Supply chain holistically. FSCM has been derived from Financial Supply Chain. The Financial Supply chain refers to all the transactions that occur between trading partners, such as sellers and customers, in a financial or monetary form for the production, purchasing, and supply of goods and services. Financial supply chain management helps a company get in enough finances to cover all the expenditures spent on carrying out the supply chain processes. The introduction of supply chain financial services from the financial organization with various approaches to payable procedures and payment arrangements among trading partners gave rise to the idea of Financial Supply Chain Management. Huge participants and external financial suppliers provide financial services that enable the supply chain as a whole to become more efficient while competing. It fundamentally simplifies the design of payment operations by using open accounts while also allowing small members to benefit from the best credit ratings of more significant contributors, lowering their capital expenses. Ultimately, it enhances the value chain’s short-term liquidity and strengthens long-term supplier-buyer ties.
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Importance of FSCM
In any company which offers goods and services, the finance, insurance, and transaction costs typically contribute to around 5% of the amount spent on the unit price of that good or service. Since these components are all included in the FSCM, businesses must strengthen their end-to-end financial supply chain management to get the most out of the offerings. Plus, it’ll also help them maximize customer satisfaction.
Typically, there are two factors that contribute to a favorable atmosphere for Financial Supply Chain Management. The first one is that since network technology has evolved, it has resulted in more visibility throughout the physical supply chain. If the supply chain processes are more transparent, then it would surely attract more customers. The other factor is a thorough awareness of end-to-end procedures and collaboration both within and outside the company to let the customers have a piece of good information about the company’s offering. The actual problem for the finance, treasury, and banking domain is persuading businesses that better financial supply chain operations will result in a lower cost of products sold, more productivity, and better financial savings management data. Here is when Financial Supply chain management comes into play.
Processes in FSCM
Financial Supply Chain Management consists of three major processes. These processes include the Procure-to-Pay (P2P) cycle, Working Capital Management, and the Order-to-Cash (O2C) cycle. These processes not only deal with the financial and supply chain flow but also focus on the requirements of the employees in a company.
Procure-to-pay (P2P) cycle
The Procure-to-Pay process describes the trading cycle from the perspective of the firm purchasing resources, commodities, or services. The corporation selects, gets, and settles for the components needed to manufacture the services or goods they provide to their consumers throughout this procedure.
Working Capital Management
Working capital management is a strategic budgeting approach that a business develops to manage current resources and liabilities for sustaining its financial efficiency. It does so by ensuring that the company has enough working capital to satisfy brief expenditures such as paying utility bills and employees any short-term financial commitments. Working capital management reduces the time it takes to transform assets and liabilities into money while also assisting in the improvement of profits and, most crucially, profitability. Inventory management, as well as accounts receivable and payments, are all part of working capital management.
The Order-to-cash cycle is similar to the P2P process, but it is viewed through the lens of the corporation delivering the supplies, commodities, or services. It begins when the seller provides their customers with an estimate and finishes when the payment is received, and the bill is reconciled. Trade receivables are an essential part of this cycle from a financial standpoint. The accounting department must generate revenue in the most effective and timely manner possible after the invoices have been issued.
Advantages of FSCM
Financial Supply Chain Management offers benefits to both the suppliers and the buyers since both of them are the two essential parts of the supply chain. It provides a number of benefits for purchasers. The buyer is able to stabilize the supply chain, optimize working capital, generate positive cash impacts, boost credit rating, and raise liquidity due to the extended credit duration. The provision of early payment alternatives appears to be the sole evident benefit for suppliers. Apart from that, they benefit from being able to minimize outstanding bills, obtain favorable financing rates, reduce financing expenses, make flexible decisions, and increase efficiency. Not only that, but correctly managed supply chain management may aid in the development of trust, confidence, and hence the strengthening of the buyer-supplier relationship. This would allow them to work on better terms and for a more extended amount of time.
If you’re interested in learning about Financial Supply Chain Management and building a strong career in the domain, then you can check out the Global Master Certificate in Integrated Supply Chain Management offered by the Michigan State University, which is ranked No.1 in providing supply chain degree graduate programs, in collaboration with upGrad. The course offers many advantages such as resume building, 1:1 interaction with mentors, live faculty interactions, student support, discussions, and many more.
Financial supply chain management is highly significant in today’s world. It is not just required by large corporations; small firms and startups can tremendously benefit from it as well. In a world where many businesses face fierce competition, financial supply chain management provides a safe, collaborative, and prudent means to guarantee that everyone participating in the process, including consumers, sellers, third-party members, and others, stand to gain from it.
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