Important areas in your company’s cash management strategy:
Large amounts can be saved by implementing effective and efficient routines.
Heard it all before? Quite likely, but focusing on cash management routines to release capital is not new, but is still just as relevant.
In the 1980s, the trend was new technology and a move away from manual to electronic payment transfers, as well as interest rate margins.
In the 1990s, it was low-priced capital - (interest rates fell) and companies moved their focus to growth, internationalisation, the development of central finance centres and out-sourcing.
This trend has continued into the 2000s, but the recent financial crisis has put liquidity access and the streamlining of money flows high up on companies’ priority lists.
In a survey conducted by Ernst & Young in Denmark in 2009 about working capital optimisation, it was revealed that companies thought that it was most important to improve and streamline companies’ internal processes.
Accounts receivable
If a lesson was learned during the financial crisis, then it was how swiftly companies’ credit worthiness can change. Carrying out credit assessments of all customers and important suppliers is a ‘must’, as is continually following up customers’ accounts receivable.
Tip: Credit assessment – swift invoicing - effective payment reminder routines
Reducing the average time of accounts receivable will give your company more capital, greater flexibility and improve your balance sheet.
Procurement process
One test is to compare your suppliers’ credit periods with the credit period your company gives your customers; if the former is considerably shorter than the latter, then your company may have a liquidity problem.
Tip: draw up a strategy – efficient receipt of goods and stock updating – approval routines
It is important to evaluate how often goods are procured, here the key is choosing between ‘just in time’ deliveries, volume discounts and the need for warehouse space. If your company has access to low-priced liquidity, a short credit period in return for discount may result in reduced costs, otherwise it may be an advantage to sit on cash reserves for as long as possible and pay on the due date.
Liquidity management
The right information at the right time is a key factor.
Has your company a constant overview of all its accounts, in both local and foreign currency? Do you draw up cash flow budgets? Do you report any subsidiaries when this should be done with sufficient quality?
A survey conducted by the Norwegian School of Economics and Business Administration a few years ago showed that some 70% of Norwegian companies continued to use their own excel models to monitor their liquidity. An adequate system for some, but perhaps not good enough for all?
Tip: a good forecasting system – capitalise on your company’s total liquidity
Interest rates continue to remain very low, but how long this will continue is uncertain?
My recommendation is that companies should review their internal money flow processes to ensure an efficient process with respect to payments made in and out. Based on our experience, there is often a great potential to release capital. In addition, any risk areas will be revealed.
If you would like more information or you would like to discuss any of the topics raised in this article, please call your CM adviser on 04800 or the author of this article.
