Question

Having adequate cash flow to run the day to day operations of a business is critical. Part of this is cash management or managing the cash cycle. What are some ways management can optimize or make a businesses cash cycle more efficient?

Answer 1

Ways by which management can optimise or make a business cash cycle more effcient

1. Management can get into an agreement with the suppliers of goods and services to extend the credit period offered by them to the business. This will result in having more cash in the hands of the company and the business will not have to worry about making frequent payments to the suppliers. Thus the cash cycle will be optimised.

2. The inventories of a business usually takes time to get sold. A business needs to realise that alot of working capital is induced in inventories, right from procurement of raw materials to production of finished goods. Therefore the company needs to follow such a policy that time taken between the production of finished goods and its ultimate sale is minimum. This is only possible if management introduces Inventory Optimisation technolgies. As a result of introduction of such technologies the cash blocked in inventories shall be reduced and cash cycle will be more efficient.

3. The most important aspect of any business growth is its Customers. Goods are usually sold on credit to the customers and this results cash being blocked in the form of Credit Sales. A business needs to reduce this time so that cash is realised quickly from the customers. Customers would usually prefer to make early payments if discounts were offered to them. One more important aspect to improve collection from credit sales is through strengthening customer relations. Therefore the management needs to take necessary steps as stated above to make the cash cycle more efficient.

4. The management should take adequate steps to increase the efficiency of the personnel involved in billing and invoicing process. Faster invoice creation would result in faster cash realisation from customers and thereby making the cash cycle more efficient. Cash flow of the business would increase if invoicing and billing process are optimised.