The Do's and Don'ts of Cash Management
Working capital is a highly effective barometer of a company's operational and financial efficiency and effectiveness. The better its condition, the better placed the company is to focus on developing its core business.
The early, primitive attempts at maximizing cash management can be traced back to the late 1970s. Unbelievably, there are still some companies who haven't yet understood that putting cash trapped in the balance sheet to better use can give them a competitive edge over their rivals.
A most recent report shows a further reduction of working capital in companies in the US and Europe compared with the previous year, of between 3 per cent and 5 per cent. This demonstrates the continuing increase in the importance of working capital management to help companies achieve their strategic objectives.
How to do It
There is more to working capital management than simply telling a company to collect its debtors as quickly as possible, to delay paying its suppliers as long as possible, and to keep stock levels as low as possible. A properly conceived and executed improvement program will certainly focus on optimizing each of these components, but will deliver additional benefits that extend far beyond the merely operational. It will demonstrate the need for ambitious corporates to integrate working capital management into their strategic and tactical thinking, rather than view it as an optional bolt-on extra.
There are a number of dos and don'ts to help guide corporate thinking. Firstly, do think of working capital management as a strategic objective that can enable your corporation's goals. We cannot over-emphasize this opening point. The same factors that drive a company's working capital also drive its operating costs and customer service performance. Therefore, by addressing the drivers of working capital a company will also experience significant improvement in operating costs and customer service.
For example, a company's working capital is deteriorating due to an increase in past due accounts receivable (AR). A review of the overdue AR illustrates a high level of customer disputes. The disputes are taking on average 30 days to resolve and consuming significant amounts of sales, order entry, and cash collectors' time. By tackling the root cause of the disputes, in this case poor adherence to pricing policies, the company can eliminate the disputes, thereby improving customer service.
This will free up the time of staff in sales, order entry and cash collections, enabling them to be more effective at their designated roles. This in turn increases productivity, reduces operating costs, and potentially increases sales. Working capital will improve, as customers will have fewer reasons to hold payment. This example illustrates how working capital is one of the best indicators of underlying inefficiency within an organization.
Consider Another Perspective
Don't think of things only from your own company's perspective. If you can help your own customers plan their inventory requirements more efficiently, for instance, you can match your production to their consumption, efficiently and cost-effectively, and do the same with your own suppliers. The potential implications for inventory levels are huge. By aligning ordering production and distribution processes, you increase inherent efficiency and achieve direct cost savings almost instantly, as a by-product. And then you discuss the best way to bill or to pay.
Do educate your organization to consider the trade-offs between different working capital assets when negotiating with customers and suppliers. Depending on the usage pattern of a raw material, there may be more to gain from negotiating consignment stock with a supplier versus pushing for extended terms. This could apply particularly in cases of long lead-time items, or those that require high minimum order quantities.
Agree Formal Terms
Do agree formal terms with suppliers and customers and document those terms carefully. Keep them up to date, and communicate those payment terms to employees throughout your business, particularly those involved in the customer to cash and purchase to pay processes, including your sales organization.
Don't allow prolific new product introduction without a clear product range management strategy. Poor product range management creates inefficiency in the supply chain, as companies are required to support old products with inventory and manufacturing capability. This increases operating costs and exposes the company to an obsolete inventory that may have to be disposed of.
Collect your Cash
Don't forget to collect your cash. Many businesses fail to implement effective ongoing collection procedures to prevent excess overdue funds or build-up of old debtors. Ask customers if invoices have been received and are clear to pay. If not, identify the problems that are preventing timely payment.
Confirm and reconfirm the credit terms agreed upon with the customer. Often, credit terms get lost in the translation of general payment terms and what's on the payables ledger in front of the payables clerk. Do devote the requisite amount of time and attention to the critical issue of dispute management.
Don't set top-down targets uniformly across the business. For instance, too many companies impose a 10 per cent reduction in working capital for each division. This fails to take into account the potential opportunity within a division and can result in setting an impossible target that acts to de-motivate. Instead, balance top-down with bottom-up intelligence when setting targets.
Targets Drive Behaviour
Do set targets that drive the desired behaviour. Many companies will incentivise collections staff to minimize the aged AR over 60 days. Does this mean that customers who pay one to 60 days late are good payers? No, aged AR over 60 days will result in increased costs and time it takes to collect the debt. By incentivising staff to lower the amount over 60 days, you keep your costs down. Do educate staff, customers and suppliers that cash and cash management are important, and are an integral part of a successful business relationship.
Look Within Yourself
Don't assume that all the answers are to be found externally. Before approaching existing customers and suppliers to discuss cash management goals, fully understand your own process gaps so you can credibly discuss poor payment processes.
Do treat suppliers as you would like your customers to treat you. Far greater cash flow benefits can be realized by strategically leveraging the relationship you have with suppliers and customers. In addition, a supplier is more likely to support you in an emergency if you have treated them fairly.
Don't however, treat everyone the same. Use segmentation tactics to split your customer supplier into similar groups. This may be based on a basket of criteria including profitability, sales, AR size, past due debt, average order size and frequency. Define strategies for each segment based around the criteria and your strategic goals.
Do celebrate success in hitting targets. Emphasise the actions that helped you get there.
Conclusion
To summarise briefly, following the dos and don'ts will enable you to optimize cash and to highlight inefficiencies in your processes that must be remedied to better serve customers. It will enable you to build stronger partnerships with your suppliers across the total working capital value chain. This translates ultimately into improvement in bottom-line results, often a good deal quicker than you might expect, and helps clarify the senior management focus on strategic imperatives.
REL Consultancy Group www.relconsult.com are global specialists in generating cash improvements, cost reductions and service enhancements by optimizing working capital. They are the only international corporate financial consulting firm that focuses exclusively on increasing operational efficiency from working capital and operations. They work with people to transform your organization, your customer's and your suppliers in more than 60 countries around the world.
Article Source: http://www.ArticleGeek.com - Free Website Content
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exiting
More Management Information:
- Group 1
- Group 2
- Group 3
- Group 4
- Group 5
- Group 6
- Group 7
- Group 8
- Group 9
- Group 10
- Group 11
- Group 12
- Group 13
- Group 14
- Group 15
- Group 16
- Group 17
- Group 18
- Group 19
- Group 20
- Group 21
- Group 22
- Group 23
- Group 24
- Group 25
- Group 26
- Group 27
- Group 28
- Group 29
- Group 30
- Group 31
- Group 32
- Group 33
- Group 34
- Group 35
- Group 36
- Group 37
- Group 38
- Group 39
- Group 40
- Group 41
- Group 42
- Group 43
- Group 44
- Group 45
- Group 46
- Group 47
- Group 48
- Group 49
- Group 50
- Group 51
- Group 52
- Group 53
- Group 54
- Group 55
- Group 56
- Group 57
- Group 58
- Group 59
- Group 60
- Group 61
- Group 62
- Group 63
- Group 64
- Group 65
- Group 66
- Group 67
- Group 68
- Group 69
- Group 70
- Group 71
- Group 72
- Group 73
- Group 74
- Group 75
- Group 76
- Group 77
- Group 78
- Group 79
- Group 80
- Group 81
- Group 82
- Group 83
- Group 84
- Group 85
- Group 86
- Group 87
- Group 88
- Group 89
- Group 90
Related Articles
What is the Most Difficult Part of an Improvement Program?
Answer: Starting one.Most of us realize that there is probably a better way to perform certain functions or tasks, but improvement programs seem to take second seat to getting the product out the door.
Innovation Management and Brainstorming Management - why people hate to brainstorm!
Creativity can be defined as problem identification and idea generation whilst innovation can be defined as idea selection, development and commercialisation.There are distinct processes that enhance problem identification and idea generation and, similarly, distinct processes that enhance idea selection, development and commercialisation.
Growing Profits is Easy!
Everyone involved in running a business from the smallest start-up to a major corporate dreams about how to achieve sustained profitable growth. I'm a great believer that business is simple - it's only us human beings that make it complex.
Problem-Solving Success Tip: Whatever You Do, Do It on Purpose
Decision-making shows up throughout the problem-solving process. The decisions may be difficult or unpopular, so it's very tempting to ignore some of them.
Managing Yo-Yo Style
Does being managed by others smack more of "Survivor" than Stephen Covey for you? Could there BE any more management styles out there-have you gotten to experience all of them yet? And what kind of manager are you-or should you try to be?If you're reading this, you're probably familiar with too many types of management and leadership styles-more flavors than months, for the most part. On the leadership, not so much.
Downsizing in Organisations - The Real Truth
I've met and worked with many people in all sectors of the business world and found that the majority of managers and team leaders are spending too much of their time on basic administrative tasks. Tasks for which they have had no training in.
Developing Your Mission
"The best Leader is one who knows how to pick good people to do what he or she wants done and self-restraint enough to keep from meddling with them while they do it." - Heidi Richards -Mission statements describe the purpose of an organization or a sub-group of it.
Improved Communication to Improve Results
Facilitating good communication can make the difference between a well oiled, effective team and disorganization and ambiguity. By following the tips below, you, the supervisor, can take steps toward improving communication with your employees:1.
Performance Appraisals: Nightmares or Sweet Dreams
Some managers think of performance appraisal meetings and recollections of torn Achilles' heels or root canals immediately surface. They're sort of "been there, don't want to go again" situations.
Create Your Methodology Based on a Standard Framework - Part One
OK. So you have decided that your organization has to improve the way in which it works.
Loyalty, Motivation And Work-Life Balance
Managers who aren't loyal to their people can't expect loyalty in return. Companies that complain about employee loyalty have usually done nothing to earn loyalty, often routinely lying to employees, demanding sacrifices that are never rewarded, shunting them aside and casting them off in the name of good business.
A Rare Leadership Skill: Dealing With People Who Want Out By Offering Crowns For Convoy
As a leader, you'll inevitably be faced with people wanting to leave your team or organization. Dealing with the challenge is critical for your leadership success.
Conquering the Number One Problem in Business--Poor Communication
The Number One problem in business is poor communication: between coworkers, with clients, across functional areas, up the food chain. When I ask anyone I meet "What's the one thing that causes problems in your company?" the answer is always Communication: poor communication in relaying instructions, miscommunication because of irresponsible delivery, too little information when conveying changes in policies or procedures, not enough exchange of information when relaying new concepts or ideas.
Delegation: When to Delegate, Who to Delegate to
There are some very simple guides for delegation.Most people delegate based on not wanting to do something.
The 5 Obsessions of a Passionate Employee
A recent report entitled "How Google Grows?and Grows?and Grows" stated that the 650 people that work at Google are the most passionate bunch of geeks in the high tech industry. Google was also recently called the fastest growing company in history.
Getting Software Developed for Your Business
At some point, your business is going to need to have some software development. Maybe your business is small, but existing software doesn't fit your needs.
What Every HR Manager Should Know About Hiring Productive Employees
The characteristics of job applicants have a strong influence on whether or not they get hired. Their characteristics also indicate the level of their productivity.
A Renewed View of the Modern Business Culture
Life can sometimes be unexciting if not refreshed by the will to create according to one's own conscience and freedom. Often, the power of passion fuses into unexciting or appealing activities.
Stop Going to Meetings - 10 Questions to Ask Before Attending a Meeting - Get More Productive
We get invited to attend so many "meetings" but do we need to attend them all? Use these 10 questions to assess if you should attend that next meeting invitation.What is the agenda of the meeting? Don't attend a meeting without a clear agenda otherwise you are wasting time.
Tales from the Corporate Frontlines: Human Resources at Work
This article relates to the Human Resource Functions competency, commonly evaluated in employee satisfaction surveys. It reflects one employee's satisfaction with the manner in which her HR department carried out their work.