How can operating cycle be shortened
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Given the uncertainty that COVID-19 has presented to the global economy, one of the biggest challenges for business owners is cash flow. As many businesses struggle with unexpected income shortages, they are left wondering how to cope with their current financial situation. Jennifer Mailhes, Business Advisory Shareholder at Doeren Mayhew, shares 12 key cash-flow management strategies to not only shorten your cash cycle, but free up cash during this pandemic. Show 1. Benchmark Financial Statements – Understanding company ratios will help to set goals, understand triggers to internal changes and identify opportunities for improvement. Use these formulas to calculate both liquidity and efficiency ratios:  2. Negotiate Your Contracts or Payment Terms with Vendors – Many businesses are currently reaching out to their vendors to review the terms of their contracts to arrive at a payment agreement in these uncertain times. By working with your vendors, you could work out a deal that is not usually available. 3. Manage Your Inventory – Your inventory may tie up a large portion of your working capital until it’s been sold. By using inventory optimization technology, you can see what the optimal mixture of inventory and cash on hand is. If you have too much of one or the other, cash flow can be affected in the short and long term. Consider selling slow-moving inventory at a large discount to free up cash that can help to carry your business through the cash conversion cycle. Be sure to adjust your purchases of inventory to expect new levels of business and consider changes in lead times on orders. 4. Create a Credit Policy – Evaluate your credit and develop an understanding of how much you are willing to extend it. By tracking your slower-paying customers and actively working with them, you can avoid challenges with your cash flow. 5. Stay on Top of Collections – Don’t let being overwhelmed allow your team to stop calling customers to collect on past-due accounts and start taking action sooner in the collection cycle. If a customer skips payment of an invoice, be sure to contact them immediately. 6. Require a Deposit or Accelerated Payments – If your goods, projects or services are tailored to the needs of your clients, they are usually accompanied by unknowns and require more time, resources and attention to detail. Consider a deposit or accelerated payments so you can rest assured you’re receiving some capital upfront. 7. Develop a System for Cash Management and Correlate It to Your Budget – As difficult and costly situations can arise when you least expect them to, spend time on a plan in the event of an issue. Gain an understanding of what affects your cash flow and income. If you budget income and schedule future costs you know you’ll need to pay, you can have an air-tight plan for when cash flow is low. 8. Accounting in Real-Time – Keep your accounts and balances current instead of working in a spreadsheet and updating changes later on. This virtually eliminates surprises in cash flow. 9. Collaborate with Vendors – Get in touch with your top vendors to see if you can stagger your payment dates, avoiding payables that are all due at the same time of month. Try to take advantage of early payment incentives and other discounts wherever possible. Another option is to ask your vendor for a longer repayment period. Instead of a 30- or 60-day period, having the creditor extend it will provide more cash on hand. If a vendor accepts credit cards, this can give you even more time to pay. 10. Pay When Paid – For expenses that directly relate to a specific sale, make sure your agreements on these expenses are based on when you get paid versus regular terms or when you invoice. Typically, this would impact how you pay subcontractors, commissions or even other product vendors where they are making certain items for specific customers. 11. Simplify Billing – Send out your invoices as soon as your project has been completed or products have been shipped in order to get cash flow coming in fast. Before you send the invoice, confirm with your client that you’re sending it to the correct person. Provide all the information they could need about your company and the order to get approval and remit payment timely. Emailing is a great method to ensure your clients receive their invoices fast; remember to follow up to make sure they received it. 12. Utilize Your Bank’s Treasury Management Service – Talk to your bank about this service that can help to speed up the collection and posting of your accounts receivable. Some of these include remote deposit capture, electronic ACH payments and a wholesale lockbox. Each of these can speed up the banking process, allowing for a shorter cash conversion cycle and an increased bottom line. Doeren Mayhew’s dedicated Business Advisory Group works closely with business owners to help them identify where cash flow management can be improved as well as offer solutions to streamline these efforts. For additional expertise when it comes to shortening your cash cycle and planning for future growth, contact Doeren Mayhew’s professionals today. How can a company shorten its cash cycle?Companies can shorten this cycle by requesting upfront payments or deposits and by billing as soon as information comes in from sales. You also could consider offering a small discount for early payment, say 2% if a bill is paid within 10 instead of 30 days.
How can operating cycle be improved?Factors Impacting the Operating Cycle
Longer payment terms shorten the operating cycle, since the company can delay paying out cash. The order fulfillment policy, since a higher assumed initial fulfillment rate increases the amount of inventory on hand, which increases the operating cycle.
What does it mean when a business has a shorter operating cycle?A shorter operating cycle indicates that a company's cash is tied up for a shorter period of time, which is generally more ideal from a cash flow perspective. Cash cycle. Also known as a cash conversion cycle, a cash cycle represents the amount of time it takes a company to convert resources to cash.
Can operating cycle be less than 12 months?If the operating cycle and payment period are not happening within 12 months, then it is classified as non-current.
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