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How to Reduce an Operating Cycle of Any Entity?

Operating Cycle

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.

What is the Operating Cycle?

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.

Ways of Reducing Operating Cycle

Now, let’s discuss the ways of reducing the operating cycle in detail!

  • Cash Flow management:- The “cash flow management” means the balance between the cash inflow and cash outflow

Cash inflow includes

Cash Sales

Debtor Recovery

Loan & borrowing

Capital Asset Sales

Advances etc

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.

  • Liquidity of account receivable faster:- How quickly your customer pays to you has a big impact on your operating cycle. Sometimes companies take advance money to deliver the goods or rendering of services.

However, some companies work on credit basis or subject to particular condition (E.g. 30 days credit period or payment after inspection)

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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.

  • Improve your account receivable process:- When we talk about to improve the receivable process basically we talk about the automation of the process. Try to reduce the operating cycle by using CRM Software (Customer Relationship Management software) which may help the organisation to increase the efficiency and it will eliminate the human intervention too.

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.

  • Disburse your accounts payable more slowly:- While it’s beneficial to your organization to materialized your receivable as soon as possible however it is also beneficial to your organization, if you delay your payable your cash in hand will increase.

Decision:- It is always recommendable to pay your due as per the invoice term only not so early until there is positive CB analysis.

  • Inventory Management:- The organization need to categorized their inventory in three categories:-

Category A:- Fast Moving Stock (Maximum storage capacity 7- 10 days)

Category B:- Average Moving Stock (10days to 30 days )

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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)

  • Treasury Management:- The treasury management means maintain company liquidity and mitigating the operational financial and reputational risk. The business requires funds for short term as well as long term hence to avoid the liquidity crunch in the company the proper and inform decision requires to be taken

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

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