Challenging Times amidst Supply Chain Crises for the Business – A Virtual CFO can be the saviour

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Challenging Times amidst Supply Chain Crises for the Business – A Virtual CFO can be the saviour

With the Red Sea crises entering its fourth month, companies and managements are struggling to maintain their supply chains. This is having a double whammy on the companies’ finances. On one hand, cost of materials and logistics has gone up while on the other hand there is a potential loss of revenue due to delay in supplies.

On the cost front, the companies are facing the following issues:

• Freight rates have increased significantly across the board primarily to due increase in cost of operations of logistics companies and also if they have to reroute through the Cape of Good Hope, the longer route has higher costs and longer lead times associated with it. Further, if the companies decide to reroute the supplies through air route, then again it entails higher freight rates for the companies.

• Insurance costs have increased. Due to the higher security risks for the vessels going through the Red Sea and Suez Canal, the war risk premiums have jumped as much as 10x from about 0.07% in October 2023 (before the Israel-Hamas war) to 0.7% in December 2023. Further for the vessels rerouting through the Cape of Good Hope in South Africa, there is an added 10-15 days of voyage which in turn increases the premiums accordingly.

• To safeguard supply chains, many companies are stocking higher raw materials which in turn is increasing the working capital requirements and the warehouse requirements for the companies. This in turn is increasing the finance costs and storage costs for the companies.

• Due to the crises, the procurement cost of the raw materials itself has gone up as much as 25-30% in some cases as the supply is constrained even at the suppliers’ end.

While on the revenue front, due to delay in supplies, there are chances of potential loss of revenue as the deliveries gets pushed to later periods.

This creates a challenge in the cash flow management for the companies where on one hand the cash outflows are increasing and on the other hand the cash inflows are decreasing or delayed. Hence, as a management you need an expert CFO to keep a check on the cash flow situation and who can manage the situation in a more organized way. Else, this can lead to the overall business disruption and can even affect the going concern for small businesses. Even if the business cannot go for a full time CFO due to affordability, they must go for a Virtual CFO

A virtual CFO in these situations can take the following steps to manage the cash flows:

• Virtual CFO can negotiate harder with the logistics partners by taking multiple quotes and analysing the quotes in detail.

• Virtual CFO can perform a cost benefit analysis of procuring from multiple sources and vendors by diversifying the supply chains.

• Virtual CFO will prepare cash forecasts for next 6 months to have clear visibility of the cash outflows and inflows and when and where the cash shortfalls are expected to occur. That ways the shortfalls can be better managed by curtailing expenditure (if possible) or taking additional finance.

• Virtual CFO can arrange for working capital finance at best possible terms and again evaluate their cost benefit analysis.

• Virtual CFO will analyse the impact of the whole situation on the overall profitability and cash flow position of the company and present it to the management and other stakeholders like investors and lenders.

By taking these steps, while the impact of the crises cannot be eliminated but certainly it can be minimized and will definitely justify the cost of the virtual CFO.

If you require consultation in your specific situation, feel free to reach out to me directly on prateek.mittal@finvalresearch.in and we can schedule a conversation.