Supply Chain Activities Which Affect Accounts Receivable (A/R)

Supply chain activities which affect A/R include:

 Negotiated Payment Terms – Negotiated payment terms can lengthen or shorten the C2C.  Payment term depend upon the perspective regarding cash flow for the business.  Some businesses want delay payment and use the cash flow other areas; some businesses want to time cash outflows with cash receipts, and some businesses want to pay early to take advantage of discounts.  Payments terms affect both large and small businesses, but delayed payments tend to hurt small businesses because they need to turn cash more readily fund the business.  Small businesses may not have the cash balances or the necessary credit to fund the business while waiting on cash payments, so long payment terms can make it difficult for a small business in meeting its current obligations.

 Sales Growth (up or down) – When a business grows, it will need more inventory to support rising sales.  Sales growth can strip a business of needed cash and increase costs because a business will to utilize credit facilities to buy the inventory needed.  When a business declines, cash is still needed to cover expenses, pay for machinery and meet debt obligations.  Good supply chain affords for better collaboration between business so that sales declines are better anticipated, and working capital needs are adjusted accordingly.

 Credit policies – Credit policies affect supply chain activities.  Selecting good customers in the first place is a good way to keep revenues flowing and mitigate the risk of non-payment.  Some business, in order to grow sales, will extend the payment terms of customers.  This “extended” credit will spur customers to buy more products, at least in theory.  Extended credit terms can hurt the C2C for a firm, and strip it of cash to run the business on a daily basis.  This can hurt a supply chain relationship for a firm, especially when it can’t pay its suppliers within specified terms because it has extended terms with its customers.

 Slow Paying Customers – This relates to the credit policies section.  Slow paying customers siphon cash from the business and increase working capital investment through non-payment.  Again, these customers can be the most unprofitable form a supply chain standpoint.

 Seasonality – Some types of products or services only sell mainly during certain times of the year.  Lawn services, homes, and toys are examples of these products and services.  Because there is not enough manufacturing capacity to meet projected demand, inventory has to be built up and made ahead of time; or for a service, equipment and people remain idle during the offseason.  This build-up of product or idleness ties up cash and creates increased working capital investment.  Good supply chain management allows for better planning and alternative uses of resources to minimize inventory investment and better resource utilization, which decreases working capital investment and increases the C2C.

 Cyclicality – Business cycles change due to changes in the economy, global issues, changes in consumer tastes, political risks and the like.  This could cause changes in needed inventory and/or services.  Good supply chain processes such as improved forecasting and better collaborative planning, allow businesses to better anticipate cycle changes, which allow businesses to reduce working capital investment as needed.

 A firm’s competitive position – A firm’s competitive position (and having the right supply chain strategy to match) is critical for a firm’s survival.  A firm establishes it competitive position by supplying what the customer desires at the least cost.  A firm’s competitive position can be affected by other firms, changes in consumer tastes, regulatory guidelines in the industry, costs of raw materials to make the product or provide the services, and so on.  Good supply chain management allows firm to maintain their competitive position through market power and ability to negotiate better pricing for materials and services better than competitors; allows firms to anticipate customer changes and provide the agility and flexibility needed to respond to the changes; and allow a firm to meet required regulations in doing business.  Firms with agile supply chains have better capabilities to respond to changes.

 Product Life Cycles – As stated in a firm’s competitive position, good supply chain management allows a firm to respond to different needs when a product progress through its life cycle.  There will be usually higher needs when a product is first introduced versus lesser needs when a product is in its decline stage.  Good supply chains adjust to both scenarios.