Is cash getting tight?
Operating cash cycle getting longer?
Find out how to calculate how long your customers are taking to pay their bills.
OPERATING CASH FLOW
Monday 11 June 2012
Friday 8 June 2012
Advantages of Factoring
The main advantage is that it offers an immediate boost to cash flow, cash is released to the business as soon as invoices are raised.
If you choose non recourse factoring you will be protected from bad debts.
Factoring helps cash flow planning, by providing greater certainty about when funds will be received.
Some businesses see factoring as a cost effective way of outsourcing the sales ledger function, freeing up valuable time to concentrate on other matters.
Pricing is competitive as there are many factoring businesses in the market.
Factoring companies can provide a great deal of information about customers, such as credit ratings and previous payment records.
Factoring companies can be an extremely useful resource especially at a time of growth.
If you choose non recourse factoring you will be protected from bad debts.
Factoring helps cash flow planning, by providing greater certainty about when funds will be received.
Some businesses see factoring as a cost effective way of outsourcing the sales ledger function, freeing up valuable time to concentrate on other matters.
Pricing is competitive as there are many factoring businesses in the market.
Factoring companies can provide a great deal of information about customers, such as credit ratings and previous payment records.
Factoring companies can be an extremely useful resource especially at a time of growth.
Tuesday 5 June 2012
Improve Cash Inflows
It is absolutely vital to get as much cash in to the business as quickly as possible, here are a few ideas that might help.
Make sure that you send all sales invoices out as promptly as possible and make sure there are no errors (do not give the customer the excuse of delaying payment whilst you sort out a simple error).
Carry out credit checks on all new customers, this could highlight potential slow payers or even worse possible bad debts. Some businesses continue to credit check key customers for deteriorating credit ratings as a sign that they may have problems.
Offer discounts for early payment.
Try and get customers to pay a deposit with their order, this may be highly desirable for new customers until they have established a good track record for payment.
Try not to let old stock soak up cash, by getting rid of old stock for whatever you can get it will bring cash into the business and free space up.
Have a robust credit control system so that customers who exceed the payment terms are contacted promptly and outstanding balances collected.
Make sure that you send all sales invoices out as promptly as possible and make sure there are no errors (do not give the customer the excuse of delaying payment whilst you sort out a simple error).
Carry out credit checks on all new customers, this could highlight potential slow payers or even worse possible bad debts. Some businesses continue to credit check key customers for deteriorating credit ratings as a sign that they may have problems.
Offer discounts for early payment.
Try and get customers to pay a deposit with their order, this may be highly desirable for new customers until they have established a good track record for payment.
Try not to let old stock soak up cash, by getting rid of old stock for whatever you can get it will bring cash into the business and free space up.
Have a robust credit control system so that customers who exceed the payment terms are contacted promptly and outstanding balances collected.
Cash Operating Cycle
The cash operating cycle relates to the time taken to convert your product / service into cash, it specifically measures the time taken from the cash outflow on materials, wages etc. to the cash coming in when the customer pays.
Lets look at an example of how it's calculated and more importantly how it can be shortened to improve cash flow for the business.
You purchase a part which is held in stock for 20 days, until it is moved into production, worked on for 3 days and then despatched to your customer. Your payment terms are 60 days from date of invoice and your suppliers payment terms are 30 days from date of invoice. The time taken from receiving the part to the payment coming in is 83 days (20 days in stock + 3 days in production + 60 days credit given to customer), however your supplier has given you 30 days credit so this must be deducted leaving you 53 days.
This means there are 53 days between you paying the supplier and the cash coming in from your customer, imagine this situation with every item you sell !!
What can be done to reduce your cash operating cycle and improve cash flow.
Let's make two changes and see the effect they have on cash flow, first the purchasing team don't buy the goods from the supplier till much nearer the point of usage, let us say the goods are now in stock for 3 days, secondly the customers period of credit is reduced to 30 days from 60, let us see how the changes impact on the length of the cash operating cycle.
The time taken from receiving the goods from the supplier to the cash coming in is now 36 days (3 days in stock + 3 days in production + 30 days credit to the customer) less 30 days credit from the supplier leaves 6 days an improvement of 47 days.
Lets look at an example of how it's calculated and more importantly how it can be shortened to improve cash flow for the business.
You purchase a part which is held in stock for 20 days, until it is moved into production, worked on for 3 days and then despatched to your customer. Your payment terms are 60 days from date of invoice and your suppliers payment terms are 30 days from date of invoice. The time taken from receiving the part to the payment coming in is 83 days (20 days in stock + 3 days in production + 60 days credit given to customer), however your supplier has given you 30 days credit so this must be deducted leaving you 53 days.
This means there are 53 days between you paying the supplier and the cash coming in from your customer, imagine this situation with every item you sell !!
What can be done to reduce your cash operating cycle and improve cash flow.
Let's make two changes and see the effect they have on cash flow, first the purchasing team don't buy the goods from the supplier till much nearer the point of usage, let us say the goods are now in stock for 3 days, secondly the customers period of credit is reduced to 30 days from 60, let us see how the changes impact on the length of the cash operating cycle.
The time taken from receiving the goods from the supplier to the cash coming in is now 36 days (3 days in stock + 3 days in production + 30 days credit to the customer) less 30 days credit from the supplier leaves 6 days an improvement of 47 days.
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