The way cash ‘velocity’ is measured in a business is to calculate it’s operating cycle.

And the key is to identify where ‘bottlenecks’ can or are occurring. This is because that is where cash can be quickly absorbed in a business and the future of the business becomes threatened.

Shorten the Cash Cycle

Let’s look at some of the ways by which we should be controlling cash flow.

Key themes:

  • Recognise the time, value of money
  • Prevent bloating in working capital
  • Debtors
  • Time/Timing
  • Creditors

Achieve timely payment using:

  • Focusing on tasks designed to improve cash flow
  • Reducing cash cycle times
  • Value Adding Management
  • Invoicing – early/on time
  • Servicing delivery – goods/services delivered on time/in tact.
  • Reducing disputes – Implement good practises.
  • Creditor Management
  • Creditor strain – manage but don’t loose control
  • Settlement discounts – take advantage if able to

Keep Inventory Levels to Optimum Level

Make a start by:

  • Checking current stock levels (raw materials) against benchmark data (industry/budget)
  • Establishing where the business is now and work on reducing current levels (use the measure as a guide to progress)

Suggestions:

  • Consider Free-Into-Store system
  • Consider bulk buying discounts – but calculate the true cost of bulk buying first.
  • Consider implementing a Just-In-Time system – but with a dedicated supplier for major inputs.

Focus on Job Velocity

Make a start by:

  • Identifying the main products or services of the business
  • Follow each through the various ‘value-adding’ processes in the business
  • Map out the process and record time taken and delays occurring
  • Measure value-adding and measure non-value-adding time to determine value-adding ratio.
  • Use the information to achieve a better result

Suggestions:

  • Involve staff in key areas in identifying products/service process flows
  • Identify areas of delay and concentrate on the largest first
  • Use measures such as value-adding ratio and time taken, as a guide
  • Consider sub-contracting if you are not efficient in certain areas.

Invoicing Effectively

Make a start by:

  • Balancing efficiency with effectiveness, ie invoice to get paid as soon as possible (efficiency may dictate invoicing in bulk at month end – but is this effective?)
  • Recognise the ‘gratitude concept. – level of gratitude reduces as time passes.

Suggestions:

  • Invoice when tangible value of product or service is delivered
  • Plan jobs with invoicing points in mind – based on identifying gratitude points

Receivables and Terms of Trade

Make a Start by reviewing debtors against a benchmark.

If performance is below benchmark, look at:

  • Debtors awareness
  • Invoicing – timing of invoices
  • Reviewing terms of trade and individual performance of customers
  • Developing a debtors management system
  • Document procedures and train staff
  • Debtor follow up/terms enforcement

If you would like a copy of my ‘Operating Cycle’ diagram, complete your details in the panel below for immediate access.


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