The Financial Benefits Of Timely Shipping
For any business, timely logistics is extremely important. First and foremost this is because they rely on their supply chain to deliver their final product to their customers. Without things arriving on time some businesses might not even be able to open their doors. In some sectors, such as healthcare and life sciences, the lack of timely shipping may even impact people’s lives. Mastering logistics on the other hand can have several benefits, from satisfied customers, lower costs, and increased cash flow to building a strong competitive advantage that other businesses might not be able to match. All of these are obvious and yet escape the attention of some businesses as finance and operations functions work in silos and everyone is focused on their own KPIs. So, here are a few points for an operations team to work hand in hand with the finance team to help improve the financial health of the organization.
The first thing to keep in mind when it comes to timely shipping is that it can help improve a company’s net working capital. Most customers don’t expect to be charged for their products until their products are actually on their way. In some cases, depending on the product or business, they may not even be charged until the products have arrived at their door. By having fast, reliable shipping, companies can be paid quicker, which helps lower their accounts receivable balance, thus increasing their overall cash flow. Another thing to keep in mind is that in most cases businesses are unable to count it as revenue until the assets have reached their intended customers due to accounting revenue recognition regulations they must follow. This can also be part of a Delivered-at-Place (DAP) contract, where the seller bears the brunt of shipping responsibilities and must provide proof of delivery once the items arrive at the destination.
In 2014 the International Accounting Standards Board (ISAB) adopted a new reporting standard called IRFS 15. This standard became effective in 2018, and helped companies by providing guidance on when to report revenue from customers. The fifth part of the five part framework states that a business can only recognize revenue when control of an asset is passed. In the case when an item is shipped out, this means that revenue can only be claimed when the item arrives at its final destination. The purpose behind this is twofold. First, it prevents others from using and obtaining benefits from the asset, and secondly, it helps businesses follow the GAAP principles.
Accountants are required to follow a common set of rules, standards and procedures known as GAAP (Generally Accepted Accounting Principles). GAAP has 10 key principles all accountants follow, a couple of which are relevant to timely shipping. The principle of sincerity states that an accountant is required to provide an accurate and impartial depiction of a company’s financial situation, which means if something hasn’t been shipped and in the customer’s hands, in accordance with the IRFS 15, it can’t be considered revenue for the business. This goes hand in hand with the sixth principle, the principle of prudence, which basically states that the financial data of the company needs to be fact based and not clouded by speculation. Getting goods shipped out quickly and efficiently helps a business be able to report their sales accurately and make their books look much better.
One of the other obvious facts is the cost of holding inventory. Simply put, products sitting in a warehouse don’t make revenue. While they are still considered assets, assets can be considered a loss of opportunity if they aren’t sold. The quicker the assets are delivered, the quicker they can be considered revenue.
It’s not just the end customer that looks for timely shipping either. Companies that rely on third parties to supply parts for their products can be impacted financially if they don’t receive what they need on time. This includes healthcare and life sciences, where delayed shipments of life saving medications and medical devices can cause delays in medical operations. This is why many companies that rely on suppliers streamline their process and make sure they receive the parts they need quickly, and if one company can’t provide timely shipping they will find one that can. This helps them increase their own efficiency and productivity, which can lead to higher profits. After all, without their supplies they cannot provide the customer with what they ordered, complete the tests needed to get their new drugs approved, and more.
The financial benefit of timely shipping is not a new concept, and has been an important aspect of many different business models in several different industries for a long time. Mercury, a Boston based healthcare and life sciences shipping company, takes pride in offering timely, global logistics for healthcare and life sciences products. We are dedicated to offering the best in cold chain solutions, with real time tracking and customized packaging to help businesses improve their bottom line.
