
Turn your assets, drive your cash
The latest figures from the Central Bank’s SME Market Report for H2 (second half of) 2017 also reveals that the SME lending market has become less concentrated in the last six months, with fewer banks retaining their market share. There are now alternatives to these pillar banks.
However, before considering these alternative finance providers it’s prudent to take a cold, hard look at the way you’re managing your working capital. It’s very likely that you have a lot of capital tied up in debtors and stock that you could turn into cash by challenging your working capital practices and policies. Here are five classic oversights made in working capital management. The latest figures from the Central Bank’s SME Market Report for H2 (second half of) 2017 also reveals that the SME lending market has become less concentrated in the last six months, with fewer banks retaining their market share.
There are now alternatives to these pillar banks. However, before considering these alternative finance providers it’s prudent to take a cold, hard look at the way you’re managing your working capital. It’s very likely that you have a lot of capital tied up in debtors and stock that you could turn into cash by challenging your working capital practices and policies. Here are five classic oversights made in working capital management.
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Over reliance on the Profit & Loss Account for devising business strategy Discounts offered on bulk buying stock may seem like an attractive idea. While it does flatter your cost of goods sold, there is often an unaccounted cost via the drain on your liquidity, as a result, slowing your asset return. Before you accept a bulk buying discount, ensure it will not carry with it a greater cost over a longer period of time.
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Rewarding sales staff for sales growth alone Cost discipline is very seldom applied to people on the front lines. Salespeople’s compensation plans in particular tend to be linked to unit or euro sales generated. This is a pity, because a properly motivated sales force can do wonders to wring more cash out of your sales. Sometimes all you need to do is make people aware that there’s more to sales than booking the deal.
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Overvaluing Quality in Production SME’s invest a lot of research and finance into quality increases.While many are appreciated and commendable, it’s not always necessary. Ensure you research your target market thoroughly to find out what matters most to them. This will allow you to redirect your investments to areas that matter most to your customers.
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Tying Creditors to Debtors Many companies relate the terms they are given by their suppliers to the terms they offer their own customers. If their suppliers tighten terms, they try to cover the resulting cash call by tightening their own credit policies. Debtors and creditors are entirely separate sets of relationships, and should be managed as such.
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The Application of Current & Quick Ratios When bankers assess their customers’ creditworthiness, they often think in terms of current or quick ratios— indicators of how much cash or cash equivalent a company can count on to meet its obligations. Bankers want to ensure that companies have enough liquid assets to repay their loans in the event of distress. The irony is that the more closely a company follows its bankers’ guidelines, the greater the likelihood that it will face a liquidity crisis. That’s because a higher (which to bankers means “better”) current ratio value is achieved by having higher levels of debtors and stock and a lower level of creditors—all quite at odds with sound working capital practices.
Article Credit: InvoiceFair.com
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