Working Capital Management is crucial to the successful running of a company. Its critical for the Management of the following: Inventory i.e. reserves of raw materials; work in process and finished goods. Accounts receivable i.e. selling good on credit so it may take a few weeks/months to receive a payment and cash balances i.e. how much cash the company needs to hold onto and how much can be invested.
The better a company manages its working capital the less the company needs to borrow. Managing working capital ensures that the company does not fail due to a short-term cash flow problem but that the company doesn't hold onto too much cash. To get a good balance on these two points is key to successful working capital management.
Basically the main goal of working capital management is to ensure that the company has sufficient cash flow to be able to satisfy both maturing short-term debt and upcoming operational expenses.
(Credit Management)
Terms of Sale
In order to entice and build up a better relationship with it's buyers we feel Comlex could allow it's buyers more time to make payments by giving them trust and ownership to take their time to check the goods being sold to them.
Comlex could encourage its customers/buyers by offering more incentives i.e. cash discounts for prompt payments. This would entice the buyers to pay on time and thus allowing Comlex to be on top of their cash collecting i.e. keeping their profit coming in and sustaining their market share.
Credit Instruments
To manage debtors and the companies cash, we would advise Comlex on a few techniques when making repetitive sales on the open market so that they secure payment on products, making sure that the company doesn't suffer any losses which would effect the profitability of the company and market share overall.
Credit instruments that can be used would be a commercial draft. Comlex plc would draw up a daft ordering a payment from the customer / buyer and send the draft to the buyers bank along with the shipping documentation, if Comlex plc wanted immediate payment this would be called a sight draft but if no immediate payment is required this is known as a time draft which the buyer/ customer would need to sign and write "accepted" to make Comlex aware that they acknowledge the debt. By using the sight draft and the time draft we feel this would allow Comlex to have more control over shipping their products across to the European market.
Customers that have a weak reputation for making payments, we would advise Comlex plc to instruct the buyer to arrange the Banker to accept the time draft thus guaranteeing the buyers debt. This would eliminate any risk of missed payments.
The drafts would secure payment from buyers so that no losses would occur.
Another technique that could be employed would be a conditional sale, which means that Comlex plc would remain the owner of the products it has provided to the buyer until payment is made. This approach would prevent situations that Comlex plc could potentially miss out on payments.
Credit Analysis
Credit analysis is important for Comlex plc in helping them to come to a clear understanding when deciding to supply a large company with stock. An analysis should be done on all new customers and current customers before supplying stock and manufacturing the goods. The benefit would be positive when it comes to Comlex plc's reputation and profits
For customers we recommend that financial statements are analysed and a general assessment made. This can be problematic as things may be over looked in the statements. We would advise going to specialist in credit assessment for example "Moody's and Standard and Poor" give a fantastic guide on the risk of firms bonds for larger companies and businesses.
Another technique that we would advise Comlex plc to use would be to issue credit checks on using credit bureaus, these can provide an overall credit score for individuals.
Comlex plc could ask the banks to undertake a credit check on the customers banking records. A healthy relationship with the Banks is vital.
The techniques listed can provide information that would help Comlex plc make the correct decision about who to do business with. It would eradicate unreliable customers thus minimising further potential debt, however, a problem with this could mean that Comlex plc devote too much time investigating potential customers and risk losing them altogether.
The Actual Credit Decision
A credit decision can be "hit or miss". If you refuse credit to a company, this means that Comlex plc would not make a profit or a loss but if Comlex plc did offer credit they would either make a profit or a loss depending on weather the buyer made a payment or defaulted.
Comlex plc should offer credit if the expected gain from giving the credit proves to be positive i.e. if Comlex receives profits greater than their losses we feel credit should be offered. This it would help Comlex plc build up a client base with companies, therefore helping Comlex plc become more established in the market place.
Any decision to offer credit should be based on a case-by-case decision, as each potential customer is different. At present with Comlex's profits declining it would be best to do this. If Comlex's plc margin of profit was extremely high we would then feel it more appropriate to have a more open credit policy but the lower the profits are the less chance there can be for bad debt.
Collection Policies
Comlex plc can manage and control its debt collecting within the business without the need to turn the debt over to a collections agency. Keeping the collections team within the business, Comlex plc can keep economies of scale in record keeping and billing etc.
Smaller businesses consider factoring in order to obtain some economies of scale but this factoring can cost a fee of 1%- 2% for administration alone. If Comlex plc wants to reduce their costs and maximise potential savings we would advise managing the collection policies within Comlex plc. If Comlex plc do their own collecting then they could avail of credit insurance against any bad debt, this would act as a security blanket if things got bad and the business couldn't retrieve its cash from its customers. A problem that could arise here would be the ill management of collecting its debts
(Cash Management)
Management of the Cash Balance
Comlex plc needs to identify the cash balance for it to meet its day-to-day expenses and reduces its holding costs.
It needs liquid cash i.e. money that is not tied up in short term investments and to be done in a way that avoids the risk of insolvency. If Comlex plc were to become insolvent it could mean bankruptcy for the company. For Comlex plc, efficient cash management means more than preventing bankruptcy; it reduces the risk to which the firm is exposed.
A suggestion for Comlex plc would be to hold cash balances up to the point where the marginal value of the liquidity is equal to the value of the interest forgone.
Cash collection and disbursement
Cash collection systems aim to reduce the time limit on collecting cash. For Comlex plc to save cash and time it needs to collect cash quickly.
The three main ways that a firm can send and receive money are direct payments, direct deposits and wire transfers.
Recurring expenditures like insurance premiums and mortgage repayments are being settled more by direct payments i.e. direct debit. The customer would authorise its bank to debit the money owned to Comlex plc from their account into Comlex's bank account, Comlex plc would then provide it's bank with the details of the customers who owe money, the amount and date.
A system called Automated Clearing House (ACH) allows the payments to travel electronically, this means that Comlex plc would know exactly when the cash is being paid and cash collection would be managed at all times. Comlex plc would be able to manage its finances more precisely.
Cheques are the most common method of payment in today's market, firms have come up with a way to ensure that the cash becomes available as quickly as possible by using concentration accounts i.e. when surplus money is transferred electronically into the concentration account at one of the companies principal banks.
Reasons for quicker access to the cash is because the company/store is nearer to the bank and transfer times are reduced and because the cheque is likely to be drawn at a local bank and so the time it takes for the cheque to clear is reduced.
(ACH) can be used for cash disbursement. It provides a direct deposit, which is automatic credit. Companies use this method of payment when making bulk payments such as wages or dividends. The ACH system is very cheap i.e. payment might only cost 10 to 20 cents. Comlex plc could use this approach, as it would be low cost. They know exactly who is being paid etc. Cash management would be precise and controlled. The only negative about using the ACH system is that it might not necessarily be as fast as using Fed wire or Chips. However using these systems is more expensive.
Relations with the Bank
Cash management is done by the banks i.e. processing payments, transferring funds and helping keep track of accounts. These services need to be paid by Comlex. The banks charge a monthly fee but are willing to waive this fee as an incentive, providing that the company maintains an averaging balance.
Companies can rely on Banks so that their business stays profitable when there are cash shortages. A bad relationship could affect Comlex plc receiving finance when needed.
Examples of when Comlex plc may need to have good relations with its bank would be for the following:
A short-term bridge loan: Comlex plc might need to ask its bank for a bridge loan when purchasing new stock etc
A Term loan: Banks are willing to negotiate on these loans before they mature but are only willing to do this if the company is well established and is credit worthy.
Credit checks when Comlex plc is carrying out its credit analysis.
It is worthwhile for Comlex plc to have good relations with the banks i.e. no defaulting on loan payments. The bank is systemic to Comlex's business operations.
In conclusion a leading example of a company who had to look at the management of their working capital was "Cytec". This company never focused on the management of their working capital until 2008 when they saw a downturn in their business activity. As with what Comlex plc has to do, Cytec focused all their attention on their cash balance as they felt that this was the correct way to overcome the economic slump. They, as do Comlex plc need to demonstrate that they can continue to generate cash to the capital markets in order for Comlex plc to remain competitive and profitable over the coming years. We feel Comlex plc needs to approach their situation in the same way in order to stabilise their share price
Dell is another company that has similarities to Comlex plc, Dell realised at an early stage that the only way to increase their shareholder value was to concentrate on their working capital management. They made changes to how they managed their inventory turnover; this improved their cash flow, which reduced their liquidity risk, leaving then with a better cash balance to distribute to share holders etc.
[Investopedia…2012]
