Cash Cycle Policies and Tactics

At the core of a healthy cash management structure is managing the cash cycle. The cash cycle embodies the outflows and inflows of cash associated with the conversion of raw materials into finished goods and eventually accounts receivable.

 The ability of a company to finance its purchases retain operating flexibility, and lower costs will determine the health of its cycle.

Smaller firms have an advantageous outlook due to limited suppliers, customers, and employees. Often companies seek to extend their payables in order to reduce time frames to finance receivables.

Ideally, companies may prepay to obtain premium pricing. Here are the keys to optimize payables performance:

1. Pay first deliveries C.O.D. Ensure your credit rating represents good standing with suppliers, in order to illuminate the risk of getting a bad reputation and limiting your options. Good standing may be used as leverage to receive flexible payment terms in the future.
2. Initially, pay bills on time. The first objective is to establish a good credit rating. Paying bills on time establishes a firm’s position to favorable future terms.
3. Maintain perfect credit with several suppliers. Obscure credit history raises doubts when seeking to secure favorable terms through references for supplier relationships. Aim to maintain three favorable credit references to lock in beneficial positioning while applying for credit with new vendors.
4. Test suppliers’ terms. Firms can identify credit limits with suppliers by testing payment terms. Generally, vendors’ policies provide buyers with about 20 days before targeting past due accounts. This typically provides firms with a twenty-day window before red flags may appear. Testing vendor’s payment policies enable companies to determine the maximum amount of time they are able to pay bills without damaging their favorable status.
5. Prioritize vendors. A supplier’s value to a company varies depending on the available options within market niches. Highly valuable vendors should be prioritized and paid within agreed terms. Managers should consider the strategic importance of vendor relationships to their business.
6. Manager supplier base. The supplier should be managed individually based on industry structure.
7. Purchase on consignment. Consignment purchasing, when available, enables small companies to reduce exposure to inventory obsolescence as well as automatically match payables with receivables.
8. Pay early when possible. It is not uncommon for suppliers to offer significant discounts for anticipated payments. Excess cash permits firms to gain favorable discounts and positions with vendors.
9. Sign all checks. Small business managers often opt to spend several hours month signing checks. While personally staying involved in purchasing volumes, identifying fraud, and identifying other significant changes that could affect their cash position.

2) Forecasting

Routine forecasting and analysis enable managers to analyze cash problems prior to escalating into contingencies.

Some smaller firms deprioritize forecasting by completely omitting it while limiting the analysis to quarterly reviews of performance.

There are at least four reasons why smaller companies lack more formal and sophisticated forecasting and analysis processes: Lack of training, no immediate need due to small size, substitution with formal forecasting and review process, and opting for previously used simpler methods.

Rapid growth or change can suddenly occur within any organization at any given time. Precise cash forecasting systems provide senior management with an accurate cash position in order to predict investment capability as well as strategic planning.

Forecasting and analyses also help alleviate the outcome of unexpected turnover by revealing data throughout the management team and documenting forecasts.

Forecasting strategies generally include monthly sources and uses of cash, balance sheets, and income statements with projections.

Reviews are conducted on a weekly, monthly, quarterly, and annual basis. Often companies begin staff meetings with the company’s current cash position. Senior management then reviews variances, investments, staffing, or other vital cash commitments and discusses ways to prioritize obligations.

Forecasting varies throughout companies generally depending on the size and scale of each organization.

Larger companies are routinely more automated utilizing computerized software which generates forecasts. Whereas in smaller, emerging companies the process is intuitive and simplistic.

Likewise, cash allocation in larger firms is typically determined by senior executives, while in smaller firms the entire senior management team collaborates to conduct cash reviews and allocate cash. Cash forecasting within smaller firms often sends their senior managers to classes to teach them how to read and interpret financial statements. Veritas Management Group provides executives with training that empowers business managers with the skills needed to interpret, read, and regulate financial statements, cycles, and cash management.

Managers who fail to consider how they manage their cash cycle are progressing in a dangerous direction.

While a firm may be small and underdeveloped, cash management appears reassuring. However, as the company develops, the need for clear financial statements and forecasting increases significantly.

Managers who hope to govern cash effectively in the long-term must understand that cash management does not start and end with balancing accounts payable with receivables and maintaining low inventories.

Sustainable cash management models provide managers and business owners with accurate forecasting and analysis systems as well as organizational blueprints that lead the company into future success.

Veritas Management Group adopts its proven models to accelerate your growth. Contact us today to secure a free business assessment and discover the best ways to take your business to the next level.