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Covid-19 and the impacts on supply chains

Jun 15, 2020

As the Covid-19 pandemic continues to bring major disruption for companies around the world, a key area of focus is the impact that the crisis is having on companies’ supply chains.

In the current environment, different companies are facing different challenges. For one thing, changes in customer behaviour have brought a sudden slump in demand for many businesses, while some have had their operations restricted by lockdown measures. For others, such as food delivery services, demand has increased rapidly, with some businesses struggling to keep up with higher numbers of orders. At the same time, labour shortages caused by the virus have made it more difficult for some businesses to fulfil orders on time.

Across all of these situations, working capital is a particular concern. Businesses which are facing dwindling orders, even for a short period, may struggle to stay afloat, particularly if they lack the ability to access low-cost funding. Manufacturing and transport disruptions may make it difficult for some companies to source essential products from their suppliers. And at the other end of the supply chain, cash-strapped customers, and those struggling with the transition to working from home models, may take longer than usual to pay their invoices.

Conversely, companies which are experiencing higher customer demand may find it difficult to scale up their businesses rapidly. While businesses may wish to increase their inventory levels in line with higher customer demand, they may find their suppliers cannot keep up with a sudden increase in production. Equally, there is a risk that companies may be left with excess stock once purchasing patterns revert to normal – particularly when panic buying has caused a temporary spike in demand.

How can working capital solutions help?

In this challenging market, working capital solutions such as receivables finance and supply chain finance can play a vital role in alleviating these challenges, protecting supply chains and helping companies optimise their working capital.

For companies looking to improve their days sales outstanding (DSO) in the current environment, seller-led solutions like receivables finance can be a powerful tool, enabling companies to sell their receivables and free up cash trapped in their accounts receivable. Asset-Based Lending (ABL), a technique in which companies can access a loan backed by a pool of receivables, can likewise help companies turn their receivables into cash – thereby helping them overcome the current cash flow challenges.

Where buyer-led solutions are concerned, supply chain finance – also known as payables finance or reverse factoring – enables corporations to offer early payment to their suppliers via a funder. Suppliers can benefit from lower DSO and access to funding at a competitive cost, while buyers can reduce pressure on their own working capital position as well as strengthening their relationships with suppliers. Dynamic discounting, in which buyers use their excess cash to pay suppliers before their maturity date at a discount, can also bring significant working capital benefits: suppliers can reduce their DSO, while buyers may be able to earn higher yields on their excess cash.

Beyond the pandemic

Working capital solutions like supply chain finance can play an important role in supporting both buyers and suppliers during the Covid-19 crisis. By receiving early payment on their receivables, companies can accelerate their DSO and gain access to the cash they need to fund their operations. At the same time, buyers can increase the resilience of their supply chains by offering their suppliers access to solutions like supply chain finance. Consequently, interest in these techniques has accelerated considerably since the pandemic began.

But while working capital solutions may be particularly valuable in the current crisis, this is not the only situation in which companies stand to benefit. Many companies first embraced techniques like supply chain finance following the global financial crisis – and this type of solution can play an important role in reducing supply chain friction whenever uncertain market conditions lead to supply chain disruption or changes in customer behaviour.

And of course, working capital solutions are not only beneficial in times of difficulty. Even during normal trading conditions, companies have much to gain by alleviating cash flow pressures both for themselves and for their suppliers. Seller-led solutions enable companies to free up cash trapped in their accounts receivable, while buyer-led solutions can help build stronger relationships and more resilient supply chains – all while bringing working capital benefits throughout the supply chain.

To learn more, visit www.demica.com.