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Sufficient cash flow is incredibly important for the success of your business as the amount in hand will affect your day to day operation and long term position too. Poor cash flow makes your day to day business operation more challenging and it also negatively affects your timeline on paying your creditors. In this article, we will discuss Reduce an Operating Cycle of Any Entity.
Operating Cycle means the time gap between the acquisition of the assets for processing and their realization into cash or cash equivalents. Fortunately, there is a way to reduce your operating cycle and speedy recovery of ultimate collection from goods and service.
Now, let’s discuss the ways of reducing the operating cycle in detail!
Cash inflow includes
Loan & borrowing
Capital Asset Sales
Cash outflow includes:-
Cash Payment for expenses
Conversion of Account payable
Principal & interest payment
Capital Asset Purchased
Decision:- Making a balance between inflow and outflow is always a critical decision for a CFO needs to take. Any in balance in this may hamper your business working and make unstable to the organization. However, proper budget and CB analysis are recommendable.
However, some companies work on credit basis or subject to particular condition (E.g. 30 days credit period or payment after inspection)
Decision:- To speedy recovery of receivable, CFO may offer some discount policy Like 2/10 terms (i.e 2% discount if the payment is done within 10 days ) and try to implement a policy to receive money as much as advance. There are two policies which industries usually follow. The details of which as follow:-
(a) 50% advance and 50% after work -Service
(b) 35% Advance, 35% on the movement of Goods and 30% after inspection. -Trading and manufacturing.
Decision:- Try to make customize the software as per the need to the particular organization and industry that will help the organisation to track regular due and will increase the liquidity when due is materialized.
Decision:- It is always recommendable to pay your due as per the invoice term only not so early until there is positive CB analysis.
Category A:- Fast Moving Stock (Maximum storage capacity 7- 10 days)
Category B:- Average Moving Stock (10days to 30 days )
Category C:- Slow Moving Stock (30 days to 6 months )
Category D:- Others (Train, Aeroplane Project etc)
To maintain an operating cycle we need to identify the category of the stock so that the projected cash budget can be prepared in a timely manner and the plan can be executed on time.
Decision:- Correct identification of the category of inventory and using JIT system (JIT system helps the organisation to limit the production as per the market demand. It is an inverse process where first we identify the demand and accordingly we produce the units with zero defect)
Decision: – Hire a good and experienced treasury manager.
It is very important for business entities to take care of its operating cycle to identify the working capital requirement. For more information, please contact us firstname.lastname@example.org