Businesses face various struggles as a result of inflation reaching levels not seen in many decades, making good cash flow management in the supply chain more crucial than ever.
The high rate of inflation is currently affecting every country in the world, and this is the result of the ongoing trends and crises in the last couple of years. Many people were forced to stay at home as part of the global pandemic response starting in March 2020, which not only made consumers put off making purchases but also created significant logistical issues for companies all across the world.
After considerable economic stimulation and the relaxation of regulations, demand surged above supply, but bottlenecks persisted in the supply chains. Furthermore, the conflict in Ukraine has disrupted the market, resulting in additional shortages of food and fuel.
Additionally, the new conflict that’s been taking swing between Israel and Palestine is yet to become a serious affecter of the world economic flows.
All of these events and ongoing crises currently have the effect of a chain reaction and can be felt in every aspect of society.
Inflation is the natural emergence in these unpredictable times, and governments are doing their best in order to put this trend under control.
Central banks are reducing the money supply in the economy in order to control inflation and curb excessive economic growth. This policy known as contractionary monetary policy, aims to slow down economic activity by making it more expensive to borrow money and reducing the amount of money available for spending.
This process goes through several instruments.
Increasing interest rates
Central banks raise the benchmark interest rate, making borrowing more expensive for businesses and individuals. This discourages borrowing and spending, leading to lower investment and consumption.
Reducing the money supply
Central banks can sell government securities in the open market, decreasing the amount of money in circulation. By doing so, they reduce the reserves that banks have available for lending, which tightens credit conditions.
Raising reserve requirements
Central banks can increase the amount of reserves that banks are required to hold, limiting the amount of money banks can lend out.
All of these instruments are part of this policy and governments can use them when inflation hits all-time highs.
But the question is what is the end goal?
The simplest answer is: To rein inflation by reducing consumer spending and investment. However, it can also lead to higher unemployment rates as businesses cut back on hiring and investment due to the increased cost of borrowing. Moreover, inflation also poses a burden to the supply chain in every business ecosystem.
How supply chain finance can be of help amid crises and soaring inflation
Supply chain finance is a tool that gives a clearer head and more maneuvering space for businesses when it comes to financial matters. So, to put it simply it emerges as a formidable tool in navigating the complex terrain of inflation.
In fact, in times of economic inflationary pressures, businesses grapple with increased costs of production, fluctuating prices, and strained cash flows. Naturally, here lies the crucial role of supply chain finance—a strategic approach that fosters collaboration among stakeholders, optimises cash flow, mitigates risks, and enhances resilience within the supply chain ecosystem.
To put it in perspective, let’s conclude that one of the essential components of capital is how and in what capacity it is earned.
A company’s capital is a valuable tool because it can be used to fund the expansion of current projects, or even fund new ones, but also earn interest in some aspects of the operations.
Therefore, under the inflationary landscape, the cash received today might have a higher value than if it is received a few days later. Practically, a company might get a lot more purchasing power today than if that cash injection comes on a future date. Or, it might yield greater returns the sooner the company incorporates it into a working capital management plan.
With that said, the solution that can reduce this effect is supply chain finance.
At its core, supply chain finance encompasses a spectrum of financial instruments and techniques designed to optimise the flow of capital throughout the supply chain. This includes techniques like dynamic discounting, supply chain financing programs, inventory financing, and receivables financing, among others. Amid inflationary periods, these mechanisms become instrumental in alleviating the financial burdens faced by businesses operating within the supply chain, especially in times of inflation.
Improved cash flow management
Firstly, supply chain finance facilitates improved cash flow management. Inflation often leads to higher operational costs, whether through increased raw material prices, transportation expenses, or elevated labor costs. Leveraging supply chain finance instruments such as dynamic discounting allows buyers to negotiate favorable terms with suppliers for early payments, enabling them to access discounts that aid in cost mitigation. This not only benefits buyers by reducing purchase costs but also supports suppliers by ensuring quicker access to liquidity, thereby alleviating their financial strains induced by inflation.
Optimised inventory management
Moreover, supply chain finance enables businesses to optimise inventory management. In an inflationary environment, holding excessive inventory can lead to increased costs due to higher carrying expenses and potential obsolescence. Through financing solutions, companies can free up capital tied in inventory, allowing for more efficient management of working capital. This enables a balancing act—maintaining adequate inventory levels while mitigating the financial risks associated with inflation-induced price fluctuations.
Enhanced collaboration and resilience
Additionally, supply chain finance fosters enhanced collaboration and resilience within the supply chain network. Inflationary periods often introduce uncertainties and risks, impacting the stability of suppliers and potentially disrupting the entire chain. By implementing supply chain financing programs, businesses can offer financial support to their suppliers, ensuring their sustainability during challenging economic phases. This not only secures the supply chain from disruptions but also strengthens relationships between stakeholders, fostering long-term partnerships built on trust and mutual benefit.
Assistance in risk mitigation
Furthermore, supply chain finance assists in risk mitigation by providing financial tools that enable businesses to hedge against currency fluctuations or volatile commodity prices. By employing financial instruments like receivables financing or supply chain derivatives, companies can mitigate the impact of inflation-induced risks, thereby protecting their financial health.
Utilising supply chain finance to address and mitigate inflation
In the face of relentless inflationary pressures, it’s imperative for companies to proactively tackle rising costs within their supply chains. Embracing innovative solutions like those offered by Liquiditas becomes not just an option but a strategic necessity. Liquiditas specialises in supply chain finance solutions that optimise cash flow and streamline operations, enabling companies to navigate inflation-induced challenges more effectively.
By utlising Liquiditas, businesses gain access to the ultimate financial solution designed to alleviate the strain of increasing costs by enhancing working capital and mitigating risks along the supply chain. Now is the time for businesses to take proactive steps and leverage these solutions to safeguard against the erosive impact of inflation on their bottom line.
If you are eager to find out more about our supply chain finance solution fill out the form here, and our experts will contact you.
