MANAGEMENT OF CASH FLOWS

SEVEN “C” MODEL TO SURVIVE AND GROW IN THESE CHALLENGING TIMES

So as feared there is bad news for the Indian economy. The first quarter of 2020- 21 the Indian Economy has contracted by more than an alarming 20% percent. Many experts believe that the news is actually worse than what is mentioned as we have got results of the informal sector. As we are all aware it’s the Micro, Small & Medium Enterprises which are likely to be worst affected. And they definitely will be in the informal sector.

In this context that this article is again written. It focusses on what firms can do to survive this tough times. It’s what I would like to call the 7 “C”s Model.The first “C’ is of course CASH.

Cash is the lifeblood of any business and even more so in the times of recession and de-growth. Spending Cash in areas which will generate additional cash flow or will save future payments is where businesses should focus on.

We shall give you some important inputs on how to manage cash during these difficult times.

Let us first begin by Understanding Difference Between Cash and Profits

First let me ask you a question can a profitable firm go bankcrupt in the immediate future. In other words can a firm which announces profits can also be short of cash. THE ANSWER IS A DEFINITE YES.

It is possible that the product or service you are into is very profitable but you may end up not having enough cash to run your business. Let’s understand this by an example. Your Supplier sells you goods at Rs 100 and you subsequently sell the goods at Rs 150. Your profit from the sale of product is Rs 50. Now we will come to actual receipts and payments. Your Supplier requires the payment of goods in 15 days and your customer will make the payment in 45 days. So, when the 15^th day arrives you have to make payment from your pocket or by taking a loan. You may also have to pay salaries, rent, power charges, taxes etc. by the month end. So, till the 44^th day all expenses and purchase cost payments have to be arranged by the business owner. If the business owner fails to manage it the business will come to a standstill. Suppliers won’t entertain you further your employee may leave you.

REMEMBER ALWAYS: MONEY BECOMES SCARCE WHEN YOU NEED IT THE MOST. A LESSON TO BE NOTED ALWAYS BY ALL ESPECIALLY BUSINESS OWNERS.

Successful companies unfortunately also suffer from lack of understanding of impact of cash flow on the business. Business owners often take loans to solve their liquidity problems and then a poorly managed cash flow may lead us into a debt trap.

The solution is simple : Business owners should plan their short-term cash outflows & Long-term cash outflows and make cash budgets.

Let me explain this with some more cash management techniques.

DEBTOR MANAGEMENT: MANAGING RECEIVABLES

Stay top of your account receivables. In tough times your customers may not pay up if you do not follow up regularly. There are some steps we can follow to Manage our receivables

1. Using factoring and bill discounting to convert the account receivables into ready cash
2. Using Cash discount as an incentive so that customers pays us faster
3. Securing accounts receivable through bank guarantees and Inland Letter of credit
4. Preparing a Good Credit policy for customers and ensuring that the policy is implemented
5. Creating profile for each customer and tracking their payment history- this will give us a fair idea on much credit we can give them (in terms of both days and Amount in vale terms).
6. Preparing Customer Ageing Report will enable us to understand the actual credit days customers are taking from us.

DO NOT LET YOUR CUSTOMER TREAT YOU LIKE A BANK. IN OTHER WORDS DO NOT GIVE INTETREST FREE FUNDS TO YOUR CUSTOMERS.

CREDITOR MANAGEMENT: Managing Trade Payables

Establishing credit line with your vendors will help free up some working capital. Ensure a tight control over your payment schedule, so as not to fall behind and tarnish your credit.Building a good relationship with your vendor will help to in managing your inventory. You will not stock more and block your working capital. Give your vendor the comfort of bulk purchase order (this will ensure regularity of business for your vendors and also build trust) but in todays difficult times it is better to take orders based on your requirements. This will ensure that neither you are out of stock nor are you excessively stocked.

A last but important point : Avoid taking any more debt, especially when businesses are more vulnerable to failure during a recession.It is better to consider selling off unwanted assets at reasonable prices.

Next week we shall continue the discussions. Till then please apply and let me know your feedback at anilrmenon1@gmail.com .

I wish to personally thank CA Abhay Nair for his valuable contributions & Inputs by taking part in all the discussions pertaining to contents of this article.

(Dr. Anil R. Menon is a business coach and a Prof at S .P .Jain school of Global Management. He has own youtube channel MenonMantras where many videos are uploaded for the benefit of business community owners and entrepreneurs)

Read The Article In Malayalam

Previous Articles in English:

MEASURING CUSTOMER ACQUISITIONS COSTS (CAC)

Why is Rupee Unusually Appreciating Against the Dollar?

Adapt to survive and grow in challenging times

Have you stress tested your business?

Will interest rates decrease further

“Survival must be the immediate short-term strategy”

How to keep your customers close in troubled times

Seven “C” Model to survive and grow in these challenging times

Read The Article In Malayalam

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