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The Cash to Cash Cycle series, Part Four
Part One can be found at http://www.bizmanualz.com/articles/01-05-05_inventory_procedures.html/?ART78.
Articles/01-11-05_accounts_receivable.html/?ART79 http://www.bizmanualz.com/articles This article’s second part
Article: 01-18-05_Sales_Marketing.html/?ART80 is the third section. Articles at http://www.bizmanualz.com
Next Week: Finish the Cash to Cash Cycle
The white flag is just a nose away. nearing a million dollars in financial savings for your business…
We have so far found $250,000 in cash savings in accounts receivable and inventory. Then we found another 250K in sales and marketing. Consequently, the final $250,000 in the cash-to-cash cycle is now accounts payable.
Without a question, the most important process to optimise for any business is the cash cycle, which runs from when you spend money to when you get it.
Reusing the Cash Cycle
Let’s relate this to accounts payable, which is the event that deals with the debt acquired when manufacturing needs to buy inventory to meet demand. Sales demand generates accounts receivable, which are subsequently turned into cash. We have now concluded our discussion of the cash-to-cash cycle.
Streamlining the Accounts Payable Procedures
Your accounts payable procedure differs slightly from the other procedures we have already examined. The first three processes we looked at were those that sought to reduce the amount of assets (like inventory or accounts receivable) or costs (like marketing) while increasing velocity or cycle time. In accounts payable, on the other hand, we prioritise increasing the asset’s size while maintaining a high credit rating and expediting the procedure.
Now let’s look at how to find $250,000 in accounts payable savings. If your company’s monthly accounts payable surpasses $500,000, cease right away. We can save $250,000 in this way. Where, you ask? $125,000 in cash plus an extra $125,000 from work automation, more savings, and better process management will come from a 25% increase in payables.
An Analysis of a Service Business Process Case Study
A business that had $600,000 in payables per month needed assistance. We examined their payables process to understand and quantify workflow, paper processing, and credit issues. We then developed and implemented a process to increase their utilisation of discounts and payables, improve the efficiency of their payables cycle, and link it to their purchasing and receivables cycles. We then reinvested $50,000 in an Enterprise Resource Planning (ERP) software to automate some of the procedures that weren’t already automated.
The measures we developed increased their efficiency from 50% to 75% after two months of implementing the new procedures, and they saw a 25% reduction in their purchasing and payables expenses. Instead of focussing only on invoices paid on time or sums outstanding, the company now uses these new processes and data to analyse the effectiveness of its payables cycle and average days payables. The result was an extra $300,000 in cash and a 50% improvement in process capability (capacity).
But how?
Methods for Developing Your Accounts Payable and News Accounting Procedures
• Throw away the paper. When it comes to vendor payments, delivery tracking and receipts, small-dollar transactions, buy orders, and purchase order follow-up, paper is the single biggest expense for any purchasing and payables department. Technology such as Web-based supplier self-servicing, centralised vendor files, automated workflows for electronic or imaged invoices (see ERP below), and payment methods like business credit cards, Electronic Data Interchange (EDI), and Electronic Funds Transfer (EFT) can be used to reduce paper handling costs by up to 90%.
Integration of ERP systems is necessary. Enterprise resource planning (ERP) allows a company to do more work with fewer workers by automating the payables and purchasing processes. Time is also saved when accessing documents using applications that match electronic bills. It is estimated that an ERP system can help a business save $300 million annually in sales.
Extend the payment terms. Negotiate the terms of payment based on the invoice or goods receipt. As a result, your terms can go up by at least one week, or 25% of 30-day terms. Use EFT for just-in-time payments to maximise your payables terms and reduce the impact on your credit.
Make use of payment discounts. Consider agreeing to the terms you are being offered, which are 2%/10 net 30. This means that if you pay within 10 days, you receive a 2% decrease instead of the usual 30-day terms. This amounts to an 18% return on capital, which is a good return on investment for many businesses.
Analyse purchases. Purchasing is a continuous process that requires regular evaluation. Consider factors like new items, new prices, combining vendors, new buying groups, odd lot penalties, payment conditions, and expedited or transportation expenses. Speak with your suppliers to improve the process. Additionally, monitor everything to account for changes in the environment.
Engage with suppliers. Speak with your suppliers to improve the process. Ask suppliers to submit their invoices online. This will save you money, time, and losses from waste.
• Put an end to arguments. Disputes with your suppliers are typically the result of issues with your purchasing/receiving process. When disputes occur, review your purchase procedures to ensure that the appropriate metrics are being generated and that you are not being held responsible for your mistakes.
• Reduce errors. Overpayments, payments to the wrong suppliers, phoney invoices, and even late payments are common payables problems. By emphasising error control and utilising written processes and audits, these errors can be considerably reduced.
•Educate staff. Provide official training to your accounts payable staff on a regular basis. By increasing their knowledge of scams, negotiation techniques, and payables economics, this will increase their efficacy.
Accounting Policies and Procedures for Cash in the Bank
Over the past few weeks, we have shown you four parts of your financial accounts that will save you $250,000 in cash. The last hurdle, Accounts Payable, was easily overcome. Officially, we have achieved our goal of $1,000,000!
Time was, and still is, the key. All you have to do is be the owner. Additionally, remember that the following week we will put all four of the cash to cash cycle’s components together and look at how they affect the working capital of your business.