Mid-Market Enterprises (MMEs) are an important component of a developing economy. Like big and small businesses, MMEs help boost local economic activity and create job opportunities that help the community.
Unfortunately, MMEs are undervalued by many sectors, leaving them to fend for themselves in a very competitive environment. Lack of talented employees and little to no government support are just some of the challenges middle market firms face.
HSBC’s “Hidden Impact Unlocking The Growth Potential of Mid Market Enterprises 2017” clearly state the plight of Middle market firms: “Despite their huge contribution – to gross domestic product, to employment and to their supply chain — these firms suffer as the ‘neglected middle child’ of business” says the HSBC report.
But the biggest hurdle many middle market firms face is keeping their cash flow sufficient for their day-to-day operations. Without good liquidity, mid-market companies will have a hard time keeping up with product or service demands, which will negatively affect their overall performance.
Because of this problem, cash flow management has become a top priority for many middle market firms, with finding viable and flexible financial solutions as one of their main objectives.
This is where Supply Chain Financing (SCF) comes in as a solution that provides a win-win solution for both buyer and suppliers. Below, we discuss ways on how SCF can help save MMEs from falling into bankruptcy.
- Better cash flow positions by having better Days Payables Outstanding (DPO)
Days Payables Outstanding (DPO) is one of the main barometers of seeing how healthy a company’s cash flow is. It estimates the average length it takes for a company to pay its suppliers, vendors, and creditors and gives an overview of how well the company manages its cash flow for payment and daily working capital.
Without an SCF in place, MMEs will have to manage their cash flow meticulously to ensure that the company have enough money for operations and also have enough money aside to pay for the invoice once it reaches maturity. There’s not much room for flexibility, and delayed payments could hurt the buyer-supplier relationship.
But with an SCF programme in place, MMEs will have better flexibility in their payment terms, and can easily pay off their liabilities before its maturity date. This is thanks to third-party funders in the SCF programme that are willing to pay creditors ahead of the maturity date while giving MMEs a flexible payment term to pay off the funder.
The length of a company’s DPO is also a big factor for many MMEs as this shows clients how fast companies can play their liabilities without compromising their daily operations. With an SCF Programme, a company’s DPO can shorten to attract more clientele.
- No Debt In Balance Sheet
Unlike getting a loan from the bank, having a SCF programme in place does not register as a debt in the balance sheet.
According to “Supply Chain Finance Fundamentals: What It Is, What It’s Not And How It Works”, Entering into an SCF programme doesn’t register as a debt, but rather leverages on the buyers accounts payable.
“Supply chain finance is an extension of the buyer’s accounts payable and is not considered financial debt. For the supplier, it represents a non-recourse, true sale of receivables. There is no lending on either side of the buyer/supplier equation, which means there is no impact to balance sheets,” the report notes.
This is an advantage for MMEs since it doesn’t hurt their financial statements by entering a separate financial liability. This keeps the company’s performance sheets clear of any negative entries that could turn off potential clients and stockholders.
- Reduce Invoice Processing Costs
Because SCF is done through a digital platform, there is less cost for processing physical invoices.
Research from the Association for Image and Information Management (AIIM) shows that invoice processing costs an average of $12.90 and this can cost thousands of dollars of potential revenue lost in invoice processing
“Businesses surveyed by AIIM say it costs them an average of 2.2 times more (and a median of 1.65 times more) to process invoices that do not have a purchase order compared to purchase order-based invoices. This puts the average cost to process a non PO-based invoice at between $18 per invoice and $25 per invoice,” the report says.
By implementing an SCF programme with an automated platform, MMEs can reduce their invoice processing costs by half, which can help with their cash flow management.
MMEs are one of the vital economic sectors of any developing and even developed countries. Without MMEs, there will be no competition for bigger firms to improve their services and products and keep prices competitive. MMEs also provide opportunities for the local labour market.
By initiating a Supply Chin Financing program, MMEs can strive better in the challenging business landscape without having to worry about cash flow management.