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Cashflow Management

On thinking about sharing some tips about cashflow management, the interesting thing that I found out about cashflow management is that cash is defined as a liquid asset, and the process of managing that cash is known as Cashflow. So, it is evident, as you can imagine, a liquid is flowing, it needs to have systems, it needs a pipeline to flow, and when there is a system of pipelines as the cash is flowing, there will be leakages and blockages. These pipelines become more complex as organizations become complex.

Anybody who would have witnessed or seen a refinery could have seen pipelines going all over the place, but this seemingly simple process of putting crude oil on one side and taking out distillates at various locations is a complex process.

The organization building itself from simplicity to complexity is an automatic process. So, we need to look up to this process as pipelines where cashflows, mini-cycles, and mini-pipelines feed into the main pipelines. We can then investigate the leakages and blockages carefully.

Having given you the ability to visualize the cashflow management, we can focus on the apparent issue of DSO, i.e., Debts Sales Outstanding or technically called receivable management.

I want to share some of the six points which I have generally seen, some of them look simple, but the point is simplest things are often the most challenging things. We haven’t seen many companies use it, we have been recommending this to our clients, and now I am sure it is for the benefit of everybody.

First and foremost – most of the companies have a record DSO which is recorded from the date of invoice but what is not recorded is the difference between the date of PO and date of invoice. Financial systems do not capture this however, they can capture the same.

An effective CFO/CEO would look at this gap and analyze why there is a gap between the purchase order and date of supply, and they will realize that the receivables cycle starts with the date of receipt of a purchase order and not the invoice. 99.9% efforts of an organization go towards managing the receivables from the date of invoice. However, if the organizations focus on getting the receivables based on the purchase order date, they will notice a difference. This is the first tool.

 

The second tool is – invoicing process. Look at the number of people or touchpoints to issue the invoice. We must focus on reducing these touchpoints or removing and automating them to make it a non-discretionary process. If people take more time or there are discretionary processes where some decision needs to be made for making an invoice, it is likely that the invoicing process will be delayed. We have observed that it generally takes about a minimum of 4-5 days for the invoice to be made from the date of service provided, which adds to the DSO cycle. Also, regular holidays, illness of the person responsible, and various other reasons delay the invoice. The longer the chain, the longer the time taken.

Look at the amount of touchpoints in the invoice-making process, bring it down or make it non-discretionary and ensure that invoices are made by an ERP system automatically. An invoice is created automatically when the goods leave, or services are rendered. Lesser the touchpoints and systems, the more effective the DSO.

Many times, when we are supplying goods or services to our customers, sometimes there is a last moment request that comes in, and there is no purchase order, or it may be following. If the customer sends the request in two purchase orders, we should also raise the two separate invoices. There should be a delay in payment of the invoice in cases where we have introduced one invoice against two purchase orders. So, sending individual invoices against separate PO is more effective, and if there is a dispute in one, the other is not held back. So, segregate and align basis the PO and payment cycle, which can be 15 days or weekly, and ensure that the invoices reach them within their payment cycles.

Last but not least, Digital invoice. The information Technology Act and the GST Act have been amended to enable digital invoices; however, sending hard copies of invoices has still not been stopped. Now I can only tell you, invoices are only as good as the customer receives the invoice. How effective is the system to ensure that the customer has received the invoice? Now if you make a digital invoice and figure out from the customer side, the contacts and emails IDs of the accounting and finance team. Most of the companies also have [email protected] or [email protected] We need to validate the same because if it is a personal email, it is probable that the person is unavailable or not working for the company anymore, and the invoice is lost in between. So, it is always better to ask or nudge the customer to have a shared email ID for sending invoices digitally.

To Recapitulate

The first point is to calculate the difference between the purchase order and the invoice date. Also, a surprise will be sitting in there as part of the DSO.

Align your invoicing system with the payment cycles and PO details of the customer and minimize the touchpoints in the invoicing and bring it down or better make it non-discretionary.

And lastly, send digital invoices.

These are some of the techniques from my side that help to improve DSO.

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