Speeding up the cash cycle

Posted on 3 September 2009

Brian Elliott
What is the cash cycle? Why is it so critical to an importer of medicines, or importer of raw materials to manufacture medicines, in developing markets? And what is the relevance of this to MeTA and improving access to essential medicines?

One of the most important factors to influence the purchasing decision of the importer is the amount of time it takes from the point of making the investment until the final payment is received for the purchase from  customers in the market. This is called the cash cycle and for importers of medicines and raw materials in developing countries this can be a very complicated, expensive and lengthy process.

Typically once a decision has been made to purchase medicines or raw materials, the importer must locally raise the full amount of the funds to cover the purchase price, deposit these funds in a local bank, arrange for a confirmed and irrevocable letter of credit to be provided by the bank to the manufacturer, place the order with the manufacturer and wait for the receipt of the consignment.

All these stages often take longer than necessary in emerging markets. This is one reason why it is in the interest of importers and distributors to engage in the MeTA process at country level. Here there are greater opportunities to change systems to be more efficient.

Here is a typical model of the cash cycle in Uganda. It should be noted that while conditions are not uniform across all developing countries, the actions and timelines included in this model are very typical in many countries.

As this model reveals, the importer will have to wait for 179 days or approximately six months before the initial investment made is fully recovered, together with profit on the full transaction. With the very high bank interest rates (e.g. 25 per cent in Uganda) applicable in most developing countries, this delay can be extremely costly if the importer has borrowed to finance the purchase, which is the normal method of financing working capital.
The above cash cycle may constitute a very significant barrier to access to essential medicines in developing countries. By engaging with the MeTA process, the importers and distributors can fully disclose the factors in the cash cycle, highlight them and rally support from the national MeTA Councils which could lead to a significant reduction in the cash cycle time.

Some key factors include:

• The cash cycle is affected by the availability of foreign exchange in the country and the government policy in relation to its sectoral allocation of these scarce financial resources. The MeTA process can highlight to governments the importance of allocating sufficient foreign exchange to the purchase of medicines and raw materials.
  
  
• The frequent requirement by banks for the importer to deposit the equivalent of 100 per cent (sometimes more) of the invoice value of the proposed purchase before the bank will open a Letter of Credit, together with the time it takes to process the applications can be highlighted by MeTA and brought to the attention of the Ministry of Finance for discussion.
  
  
• In some countries it is a requirement that all imported medicines should have the local market authorisation numbers printed on the product packaging. Many manufacturers produce standard export packs in very large quantities for sale in a multiplicity of export markets. These large scale manufacturers are very reluctant to produce small quantities for sale to specific markets. Access to these standard export packs would allow manufacturers to supply medicines much faster as they could supply the required quantities directly from their stocks rather than having to manufacture them for each order received. MeTA can discuss with the Regulatory Authorities in MeTA countries the possibility of amending or changing local regulations to facilitate easier access for manufacturers to supply the market.
  
  
• Customs clearance procedures at the port of entry can take some time and MeTA can highlight these delays to the appropriate government authorities.

If the cash cycle can be speeded up, an investor could turn over an initial investment more frequently in a financial year and, even with a lower margin, can gain a greater return on this investment.
 

Accurate market information

Understanding all the factors in the cash cycle is very important and importers and distributors should be encouraged to disclose all the elements in their particular cash cycle model. Any data and information collected by MeTA should be accurate and robust and will be validated through the MeTA process. The data can be brought to the MeTA Councils for discussion and actions and interventions agreed with the appropriate authorities.

Being at the table

As data and information are collected by MeTA and analysed, evaluated and discussed at the MeTA Council, certain solutions to reduce barriers to access will begin to emerge. These solutions may require negotiation among stakeholders before MeTA recommends that government implements new health policies or changes legislation.
By engaging with the MeTA process, the importers and distributors in the essential medicines supply chain will be provided with an outstanding opportunity to gain an understanding of all the factors which inform the MeTA Council decisions and recommendations, to express their views and opinions and negotiate the inclusion of policies and factors in these recommendations which they consider to be of most relevance and importance to them.