The age old saying that Profit is vanity and cash is reality remains the most universal truth for all businesses. It is the easiest to understand but most difficult to internalise. It is therefore a cliché to say that prudent cash management continues to make the most significant difference between success and failure of companies.
In this article I would like to point out several areas which can help companies to release trapped cash and help them remain liquid to ensure continuity and growth. Money can be locked in working capital as well as long term investments which do not deliver the requisite returns. Let’s us examine these one by one and develop an action plan to manage the cash crunch.
Life is a series of cause and effect. Whereas liquidity crisis is an effect, we will today review the causes and learn ways to mitigate them.
- Inventory: High inventory due to improper planning leads to accumulation of slow moving and non-moving stocks which become difficult to sell and also occupies space in warehouses. Focussed MIS reports highlighting extent of slow and non-moving stocks provides Senior management the opportunity to take timely decisions regarding procurement processes and depletion. The natural fall out of excess inventory is higher borrowings and/or delayed payments to suppliers which affects credit rating and image in the market place. A reduction in the number of days inventory will help in releasing trapped cash faster.
- Receivables: Reducing the DSO is a natural transition towards release of trapped cash. This can be done if companies follow disciplined internal policies and guidelines. Many a times collections are delayed due to late delivery of invoicing to customers or delay in issuing credit notes. Inaccuracy of statement of accounts sent to customers will hamper credibility and collections. The senior management focus to drive collections from the market is a vital ingredient to reduce DSO and release cash.Ways of reducing receivables could be without recourse invoice discounting/factoring with financial institutions. Moreover, If incentives to sales team are factored on growth in collections the DSO will see significant improvement not to mention the quality of receivables.
- Move towards a shift in customer base: In the hospitality sector for example, a directional change towards increased revenues in retail sector vis a vis hotels and restaurants have helped many food distribution companies to tide over their cash issues albeit at lower margins.
- Closure or divestment of non-performing investments is another method of releasing cash from the system and utilising them in areas which are delivering results.
- Offering an equity stake against an existing loan can reduce the debt burden if lenders are willing to walk this path based on the potential of companies.
- Raising capital through new investors or current shareholders either through rights issue or IPO. Cash strapped companies have successfully demonstrated this method to ensure continuity and growth of business.