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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 obvious, as you can imagine a liquid is flowing, it needs to have systems, it needs pipeline to flow and when there is the system of pipelines as the cash is flowing there will be leakages and blockages.

It is now we need to just go through these pipelines and understand as organizations become complex these pipelines become more complex.

Anybody who would have witnessed or seen a refinery, could have seen pipelines going all over the place but it is simple process: Put crude oil one side and you take out distillates at various places however the process is complex.

Organization builds itself into complexity, from simplicity to complexity is an automatic process. So, we need to look up to this entire process as pipelines where cashflows and the mini-cycles and mini-pipelines which feed into the main pipelines. And then we can investigate the leakages and blockages carefully.

Having given you the ability to the visualize cashflow management, we can focus on the obvious issue what we call as DSO which means Debts Sales Outstanding or technically called as receivable management.

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

First and foremost – most of the companies have a record DSO which is the 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 gap between the purchase order and date of supply, and they will realize that the receivables cycle starts with the date of receipt of 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 of getting the receivables basis the date of purchase order, they will notice a difference. This is the first tool.

Second tool is – invoicing process, just look at the number of people or touchpoints to issue the invoice. We must focus on reducing these touchpoints or remove the touchpoint and automate it and make it a non-discretionary process. If people take more time or there are discretionary processes where some decision needs to be for making an invoice, it is likely that the invoicing process will be delayed. We have observed that in general it takes about minimum 4-5days time for the invoice to be made from the date of service provided and that adds to the DSO cycle. Also, regular holidays, illness of the person responsible and various other reason delays the invoice. Longer the chain, longer the time taken.

Look at the number of touch-points in the invoice making process, bring it down or better make it non-discretionary and ensure that invoices are made by an ERP system automatically. The moment the goods leave, or services are done, and invoice is made automatically. Lesser the touch-points and systems, 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 and if the customer in sending the request in two purchase order then we should also raise the two separate invoices. There is ought to be delay in payment of invoice in cases where we have raised one invoice against two purchase orders. So, sending separate 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 of the customer and ensure that the invoices reach them within their payment cycles.

Last but not the least Digital invoice; the information Technology Act and the GST Act have been amended to enable digital invoices, however the practice of sending hard copies of invoices have still not been stopped. Now I can only tell you, invoices are only as good as the invoice is received by the customer. How effective is the system to ensure that the invoice has been received by the customer? Now if you make a digital invoice and figure out from the customer side, the details of the accounting and finance team- their contacts and emails IDs to be sent, most of the companies also have [email protected] or [email protected] , we need to figure out the same , because if it is a persons email it is probable that the person is unavailable or not working the company anymore, the invoice is stuck. So, it is always better to ask or nudge the customer to have common email ID for sending invoices digitally.

Just to Recapitulate

  1. The first point is to calculate the difference between the purchase order and the invoice date. Also, as part of the DSO, a surprise will be sitting in there.
  2. Align your invoicing system with the payment cycles and PO details of the customer and minimize the touch-points in the invoicing and bring it down or better make it non-discretionary.
  3. And lastly send digital invoices.

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

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