Profit & Cashflow - A perspective of Supply Chains critical contribution to the enterprise

When I inquire with professionals in the industry of what do they think is the objective of an enterprise. I always hear - It's Profits. Can't agree more than that as it is pretty much commonsense that Profits is an important goal to achieve.

I always believe that a company can have Profits but still go bankrupt. The thin line of difference is a Supply Chain effect on company. The heart of running an enterprise is - Cash flow. An enterprise needs money to pay for its Current Liabilities which naturally it desires to pay from its Current Assets. Supply Chain activities are a great contributor to both the side of the balance sheet hence on the cash flow of an enterprise. e.g. Inventory as a Current Asset looks fine as long as its liquidated in time to generate funds before the cash outflow of the Vendor payment is due. No Asset ever got created without an corresponding Liability, isn't it? So Inventory being an asset is to be funded with Vendor offering credit. This balances out the Cash flow. Now in case when the mismatches start occurring the cash to go out of the enterprise shall happen earlier than the cash coming into the enterprise. This Cash flow problem can have its roots in many Supply Chain processes, activities, behavioural characteristics and so on. But the fact is the Cash flow being negative shall put stress on the enterprise to organize for funds to meet the obligations. In the Wave effect of Covid-19 (http://blog.think-spark.com/2020/04/wave-effect-of-covid-19-on-supply-chain_23.html) this is likely to happen.

During all this an enterprise may have a Profit reported. But the question is the sustenance of the profit. As mismatches of Cash flow result into increased "Cost to Serve" with no guarantee than "Price" can be increased to pass-on the increased cost. Hence Profit & Cash flow while they look exclusive they are not. In many enterprises Profit is the responsibility by Business Heads & Cash flow is organized by Finance, Supply Chain remains unaware and unaccountable of the impact of its actions on both. Rather for Profit as well as Cash flow the root is with Supply Chain.

Post Covid-19, Purchasing power of customers is probably going to be dampened hence correcting this problem by renegotiating Sales price with the customer or increasing the consumer price may not be possible for many enterprises. With interest rates at all time low (In India as well as large part of the world) negotiating better rates of financing the Cash flow have limited room as one can't expect further dramatic interest rate reduction. To improve the Cash flow situation simply delaying vendor payments shall probably lead to further stress on a stressed Supply Chain partner. Hence the need it eliminate the root cause of the problem, which in my opinion is enterprises perspective to make Supply Chain responsible for Profit & Cash flow may be through an integrated Performance Management Systems. I also believe the need is to sensitize each executive in the enterprise for his impact on enterprise financials. Last but not the least, "Supply Chain" practices, need to evolve to improve Cash flow which ultimately will result into improved Profit.

As we pass through the next decades of Supply Chain evolution, enterprises with poorly managed Cash flow shall seize to exist however they may report a Profit for a while.