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Cash flow management
Managing cash flow is an important part of business operations. It allows businesses to reduce the need for external financing and improve profitability. The cash conversion cycle (CCC) is a key metric that helps managers manage working capital effectively. It consists of three components: Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO).
A shorter cash conversion cycle is good for a company’s financial health. It frees up money that is locked up in inventory, reducing operating expenses and interest costs. It also increases the likelihood that a business will be able to repay debts or advance credit from lenders.
The best way to shorten the cash conversion cycle is to ensure that inventory is managed efficiently. This can be done by implementing a just-in-time inventory management system and avoiding excess stock accumulation. Similarly, it is beneficial to reduce the DSO by encouraging customers to make upfront payments or by offering discounts on early payments.
Liquidity management
Liquidity management is a crucial part of any company’s financial health. Without it, a business can find itself unable to meet its debt obligations or pay for inventory. This can be an expensive proposition and potentially put the company out of business.
Liquidated assets include cash, marketable securities and short-term investments. Finance teams use liquidity management to optimize these liquid assets by moving funds where they are most needed. For example, they may move funds from a long-term investment to cover short-term expenses or rework payment terms with customers and suppliers.
The Cash Conversion Cycle (CCC) is an additional metric that helps to evaluate the effectiveness of a company’s cash management strategy. It traces the money that flows from cash invested in purchasing inventory, through accounts payable and sales receivable, to cash received back into hand. It’s an important addition to traditional treasury management metrics and can help companies identify opportunities for improvement. It also offers a more complete picture of liquidity risk.
Inventory management
The inventory management process is crucial for businesses to enhance profitability, curtail expenses, and augment customer satisfaction. It allows companies to make informed judgments regarding procurement and production and improve the precision of demand forecasting. It also helps them reduce stock-outs and ensure compliance with regulatory requirements.
Effective inventory management involves minimizing excess inventory and maximizing sales. This can be done by implementing efficient purchasing practices and optimizing credit terms with suppliers. It also entails setting par levels, which are the minimum quantities of each product that should be kept in inventory. These levels are determined by a variety of factors, including price, demand, and supplier reliability.
Inventory management is an ongoing process, and it requires the use of tools such as standard operating procedures (SOPs) and spreadsheet formulas. However, too much focus on these techniques can be counterproductive, and it’s important to keep them in perspective. To get the most out of these strategies, they must be paired with ongoing and consistent analytics.
Accounts receivable management
Accounts receivable management is the process of tracking, managing and collecting amounts owed to a company by its customers for goods or services that were sold on credit. This includes the issuance of invoices, credit assessment, and dispute resolution. Managing AR effectively can help businesses build solid cash reserves, strengthen relationships with vendors, and increase customer satisfaction.
A short CCC can be achieved through a variety of methods, including implementing effective credit policies, negotiating discounts with suppliers, and streamlining invoicing procedures. It is also important to track CCC over time to identify any operating changes that may have an impact on the metric.
A lower CCC is an indicator of efficient working capital management, and businesses should strive to improve it. To do this, they should monitor their CCC and develop strategies to reduce it. This can include reducing the number of days it takes to collect payments, implementing better invoicing systems, and conducting strict follow-ups on overdue invoices.