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Liquidity planning In order for the Company to plan its liquidity and use it optimally, it must specify the following: First: The purpose of the financial planning of cash is to achieve long-term plans (3-5 years), medium-term plans (1-3 years) or short-term plans (weeks - months). Second, its strategy is determined in action. Is it an offensive strategy because it produces a good new commodity in the market and controls it in the market as well as its ability to take risks and looking for new opportunities to seize it with a great deal of certainty to achieve this, enabling it to adopt the strategy of diversification, Expansion or integration or is it a defensive strategy because it faces many environmental threats and can not control the surrounding conditions and the goods produced by it can not compete in the market and have no opportunities for success or development or improvement and not only to take the curve of liquidation or merger or Discriminate on goods or consumers without others or stop selling some goods and the closure of some production lines and after which determine the strategic pursued in accordance with the above can be measured in light of their financial capacity to measure the following: - Its ability to increase capital (short term, long term, loans, equity).- The extent of its resources to achieve future liquidity.- The cost of its capital compared to other competitors.- Its relationship with investors, borrowers and shareholders.- The effectiveness of their financial systems for cost control.- The efficiency and effectiveness of the applicable accounting systems.- The size of its working capital and its flexibility according to its components.- The quality of the control of its stock.- How much liquidity do you need to work?- What is the value of long-term and short-term commitments.- The amount of cash flows from operating.- The amount of cash flows from investment- The amount of cash flows from financing.In light of the above, the company can plan the optimal model for managing and planning its liquidity.For example, the Miller-Orr ModelBy determining the maximum and minimum limit requirements within the Control Limit Method so that a maximum limit and minimum cash is determined so that whenever this balance reaches its maximum limit, the administration directs the surplus cash to the minimum to keep the cash balance always within the limit Max and Min are suitable for another model according to the data available to them.
The first step is to assess the current position and current status of the working capital. Identifying incoming and outgoing assets and receivables and adjust them to the levels of WC. With the right information, will be easier to identify the trouble spots like late payers and invoices not closed, or even days and more. The (KPIs) indicators and inventory metrics should be included in the plan, with constant focus on them will drive cost savings and improve the efficiency in the company.
The next step is to set the assessment for every team, per division and maybe per region to clarify what is the goal and what should be done, set target dates for results, to insure that everyone understands their responsibilities, so continued efforts remain focused and consistent. Someone said that leadership drives ownership, and if more members of the team feel that they own the project, the more effort they will give. Once the assessment been completed and the metrics evaluated, we should have high understanding of the challenges and opportunities infront of us.
The plan can include:
- concentrate on your people (education and communication)
- lose the slow moving inventory and concentrate on the fast moving (that will generate more cash)
- enforce payment discipline and more effective management of payment terms ( days payables, days receivables, days WC..)
- closer collaboration and process adjustment with customers and suppliers.
- better coordination between functions and processes
- making sure that all of employees understand the priority and motivate them by setting targets.
At the end we need to make sure that the plan is sustainable, always keep room for improvement and further analysis and collaboration is the key for success.
FOCUS on following areas to improve cash flow for any Manufacturing Industry-
1] Zero or Minimum Inventory - Follow JIT
2] NO WIP's
3] Raw Material Control
4] Ensure first time yield
5] Keep your most IMP resource motivated - PEOPLE
There could be many more factors but what I have mentioned will be definitely on the Top list.
in my point of view cash flow statement can solve all your problem as this
statement show how cash comes in and out of a business
as all know this statement consistes of three parts 1-operating activity 2- investing activity 3- financing activity . from this classsification you will know how to prevent the problem to occure , but working capital measure both the company^s efficiency and its short term financial health by using this calculation = current assets - current liabilities
First thing in order to solve these problems is to Identify the CAUSES of these problems, only then they can be resolved!
There are numerous text book means which do not always work. I have experienced some of these problems at my Job and we successfully resolved them or at least sailed through the situation for a longer time. For me, the most important, as mentioned by someone below, is PEOPLE. With a determination and motivation at the end of team, and when I say team it doesnt mean Finance team alone, it is not very difficult to sail through tough times.
And, offcourse, there is an array of ways and means from finance textbooks which is used by team to solve liquidity issues, foremost one is speeding up collections and delaying disbursements but not up to a point to affect business reputation, definitely PEOPLE play here most important role. We can also resort to external short term financing which is soemetimes expensive and most of time depends upon the organization's financial position and performance. Assesment of overheads and delaying of certain expenditures is another way. Renogatiating credit terms with suppliers can be an interest free source of short term financing.
Liquidity is a broad topic and it depends on the circumstances how to handle this. It varies from business to business depending on multiple fcators including nartue of business and working capital cycle.
The most important points as below
1- Through strong and intelligent Financial and control system
2- Make Analysis from time to time for weak and strong point
3- To control commercial life cycle and cash cycle
4- To Review credit policy for all client if it is within your policy and market or not to avoid bad debit
5- To make matching between Assets and liabilities (Cash out and cash in) and make balance for short run and long run
There is no specific answer how much working capital amount, but If you want to cntrol working capital and cash flow you must master some things:
1- components of working capital(cash&cash equivalents, marketable securities, accounts receivable, inventory, accounts payable... etc.)
2- types of component (urgent or not) specially inventory and accounts receivable (easy convert to cash or not) & payable (urgent or not)
3- operating cycle & cash cycle
4- type of management (conservative or aggressive)
5- types of working capital you need (permanent or temporary)
6- what are future needs of money
7- equations of working capital components management
*** by cooking all this components together you can control working capital &cash flow problems.
I agree with the answer of Mr. Ayman Atef
http://lentreprise.lexpress.fr/gestion-fiscalite/budget-financement/six-conseils-pour-eviter-une-rupture-de-tresorerie_1523938.html
