Managing Your Company’s Cashflows

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Many times, whether as a junior or senior managers, top managements will harp on the need of good cashflows and the necessity to implement proper cash management. However, even before embarking on cash management we must firstly need to understand about cash operating cycle of a business and what factors that can contribute to more cash into your organization.

Below is an article which enable the reader to understand about cash flow and proposed many ideas for managers to improve their organization’s cash flow.

So let start with what is “cash operating cycle”:-

Cash operating cycle is a close loop cycle which encompasses the five stages of normal operating business cycle:

(a) The receipt of raw materials from suppliers;

(b) Conversion of the raw materials into work in progress and finally to finished products;

(d) Collection from the accounts receivable and

(e) From the collections utilized to repay the accounts payable.

Cash Operating cycle is also known as the Operating Business Cycle or Cash Conversion Cycle (depicted in number of days) or Daily Working Capital.(in number of days)

In the Cash Operating Cycle, we have three (3) key components that we should focus upon:

Inventories whether in the form of raw materials, work-in-progress or finished goods
Accounts Receivables or trade debtors,
Accounts payable or the trade creditors

Now, you would have got the idea that the way to improve cash flow is to improve the cash operating cycle or to shorten the gap of this cash operating cycle from the time we received the goods until the time we received money from our accounts receivables and to optimize the time period of payment to our accounts payable.

So what else can we do to improve our enterprise’s cash flows?

To facilitate easy reading, append below a checklist which might give a quick snapshot on how to improve cash flows whether in terms of quantum and/ timing:-

1. Marketing/Business:

Improving Pricing policy

With more innovative pricing, higher gross profit margin can be achieved and assuming constant cost hence when the money is collected , there is then a larger quantum of “liquid profits”

Attempt to increase Sales VolumeAgain, the impact means a higher sales and assuming costs maintained. So, if cash are collected back, then there is a larger quantum of “liquid profits”
Seek deposits or multiple stage payment.

2. Be Thrifty/Adopt a Good mindset on Cost Effectiveness:

Reduce or manage effectively the business expenses. Look at Return on Investment and how individual expenditure can be spent more effectively to get the require results.

With this, cash outflow in terms of payment of goods or services can be smaller hence overall net cash flow can be saved/improved

3. Manage Your Cash Flow Spending For Capital Expenditure:

Manage your cash outflow of capital expenditure by ensuring that the fixed assets are absolutely necessary before incurring it. For a business, there is a need to weigh profitability and cash flow in investment appraisal .Hence, payback basis might be one answer to improve cash flow.

Defer projects that cannot achieve acceptable cash paybacks.
Focus on short or quick payback though profitability level might not be the desirous level. Perhaps, balancing this cash flow with other projects that give higher yields might be more appropriate
Defer unnecessary and unproductive capital expenditures

4. Get More lee-way/installments :

Seek to extend/re-negotiate debt repayment periods & banking facilities.

Apply for tax installments to the Authority for the payment of any income tax payable

5. Get More alternative sources of financing:

Obtain other sources of financing like bank overdrafts, term loans, debentures, and longer credit terms from suppliers.

Use factoring facility to convert your billings to customers into cash.

Instead of using one lump sum to paid for fixed assets, go for leasing or hire purchase terms to alleviate cash flows problems

6. Do consider injecting additional Owners Equity:

Strategically, when the business is expanding drastically and to prevent overtrading or under-capitalized ,it is critical that the shareholder need to put additional money in the form of paid up capital into the business instead of relying on external parties

7. Top Management Must Seriously Review Its Risk Appetite:

A business cash flow can be improved if top management exercise less risk appetite and are more conservative/ prudent so that cash flow can be conserved within the business instead of aggressive investments into the projects.

8. Top Notch Planning for Cash flows:

To improve the cash flow, it is important to review all cash flow projections whether cash inflow or outflows and the ability to PLAN, TIME or MATCH it accordingly. This might “help” to alleviate some challenges posed by cash flow deficit though this is a short term gap measure.

9. Watch Out For Effective Asset Management:

Hive off or dispose off unwanted, surplus/idling fixed assets and investments
Any non-core business assets to disposed off?
Plan strategically by looking at innovative means of unlocking cash out of your fixed assets like Sale and Leaseback, creating Real Estate Investment Trust (REIT)
Make your fixed assets investment turn faster. For example, convert it into warehousing facilities to lease out to others or sub-lease your office which has surplus space or share common facilities and leave balance for rental, etc

10. Be Innovative:

• Minimize your cash dividend payout by issuing script dividend or bonus issue

Use barter to acquire goods and services

11. Managing Working Capital

General:

Improve your Order to Cash cycle by simplification, standardization and automation leading to error free process flows to enable money to be collected without much disputes
Use the 80/20 rule to manage current assets.

(a) Managing Inventories:

Establish better planning and forecasting to reduce the lead time of inventories from suppliers.
Convert raw materials into work-in progress to anticipate for sale to customers. This needs great efforts for both production,sales department and the customers.
Sell off or return obsolete/excess inventory(even with a loss just to generate the cash flow)

(b) Managing Accounts Payables/Creditors/Suppliers:

Encourage suppliers to keep stock for us ( just in time concept) or on a consignment basis
If you are a big corporation, can you get your suppliers’ factories to be close to you to supply the JIT stock requirements?
Review any cash term with our creditors, if need be to extend the credit terms by ensuring long term relationship and promise to pay timely
Make prompt payments only when we need to enjoy discount from the creditors.

( c )Managing Accounts Receivable

Improve systems for billing and collection.
Review credit terms with our customers wherever possible
Be more selective (if possible) when granting credit.
Offer a well structure cash discounts scheme to enable faster collections from customers (add deterrent charges like late payment charges /fees if debtors have not settled on time)

This entry was posted on Sunday, October 14th, 2007 at 2:09 am and is filed under c. Cash Flows. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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Snapshot Of All Articles Under The Heading Of Cash Flows Statements | MBA Accounting Says:
March 16th, 2008 at 11:53 pm
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Managing Your Company’s Cashflows

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