We have heard recently that the UK economy has returned to growth as consumers’ demand was greater in the last month and the positive reading of GDP gives some optimism. However, inflation in May was still 8.7% at a 31-year high.
The reality is that the demand for working capital grows and supply chains are impacted by many financial constrains in accessing cash to fulfil orders and obligations, which ends up in higher cost of sales. It's important to watch out for the impact of inflation on supply chains and production prices.
- Working Capital: Beyond the obvious impact of inflation on demand, rising input costs such as raw materials, and energy, and the whole increase in production costs, it raises the need for working capital to maintain inventory levels.
- Payment Terms- Inflation can impact accounts receivable and accounts payable. Suppliers demand shorter payment terms impacting the buyers working capital, reducing their investment capabilities.
- Supply Chains: Inflation can disrupt supply chains, firstly by raising the price and availability of raw materials and components. Secondly, through the negotiation of new contracts or seeking alternative suppliers, to remove dependency on a region and reduce geographical disruptions and delays.
- Inventory: Inflation may influence inventory management practices. Building larger inventories as a hedge against anticipated future price increases. This can tie up working capital, increase carrying costs, and potentially result in excess inventory if demand does not meet expectations.
- Currency: Inflation can affect international supply chains through currency fluctuations.
Neutralizing negative influences may be obvious and simple but a strategic and wise approach may fix the problem in longer term perspective with less dependency on such fluctuations.
- Improving access to working capital management: Working capital needs to be assessed in light of inflationary pressures and cash flow projections and capital investment plans need to be adjusted accordingly. Financing options beyond traditional channels, can help manage working capital effectively, creating the flexibility that enables corporates and suppliers to better respond to uncertainty.
- Supplier relationships: Positive and strong relationships with suppliers are crucial during inflationary periods. Open communication and collaboration can help navigate price increases and identify cost-saving opportunities. Exploring alternative sourcing options and diversifying suppliers can also mitigate supply chain disruptions.
- Supply chain optimization: Continuously monitoring and analyzing supply chain operations can help identify potential bottlenecks and vulnerabilities arising from inflation. Implementing agile supply chain strategies, such as adopting technology for real-time visibility and optimizing inventory management practices, can enhance efficiency and responsiveness.
In summary, inflation introduces considerable volatility in supply chains. Removing some of that volatility through flexible working capital solutions such as Crossflow can make a buyer a first-choice customer for a supplier, reducing input inflation and providing stability for the suppliers working capital. A win-win for all.
Here at Crossflow, we collaborate with the world's largest financial institutions enabling accessing to funding, and in turn we work with our corporate clients to increase the robustness of their supply chains by harnessing that working capital through our working capital marketplace.
It would be great to hear your thoughts and please message the team at Crossflow if you would like to discuss how are working with our corporates on securing their suppliers, back by some of the worlds largest financial institutions.
Magda Rozczka is CEO at Crossflow. After completing her postgraduate MBA, Magda led product development within the insurance sector at ING and Zurich. Magda represents Crossflow on the Bank of England Decision Maker Panel, which influences UK interest rates, and has represented Crossflow as part of HM Treasury’s Women in Finance initiative.