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Current capital management: how to avoid freezing your money

Current capital management: how to avoid freezing your money
17.08.2015


The market and its needs alter too fast. Current capital management is a flexible process, which requires continuous attention and adjustments. But regardless of the period and conditions in the market, the principle objective is to ensure the management quality. This is the factor, on which the general success and the business long-term stability depend.


Before starting to move in any direction, one should determine the strategy. Moving “by the feel” is fate of a fly-by-night business. Actually, current capital management means planning of and control over the interrelation between current and non-current assets, as well as their further financing.


Inventory management


A sense of proportion is very important in everything, as frozen assets can be compared to a plummet, which may sooner or later serve a dirty trick to a business. What is the use of a packed warehouse for a bankrupt company?


Once, our company faced the problem of optimisation of the volume of inventories. The mining market decreased by 50% in our country last summer. Consequently, the inventory turnover decreased, too. Part of the manufactured products turned out to be unclaimed by the market. To identify reserves and shape an action plan, we conducted an efficient assessment of the inventory and the finished products, reviewed the standards for inventories. As a result, the material assets were grouped as surplus inventories, which would not be involved in the nearest time, surplus inventories, which would be involved by the end of the year according to the developed plan, and standard inventories. Part of the materials assets began to be purchased for certain orders; besides, we determined the items of the material assets that we could keep at our warehouse. The unclaimed inventories were partially offered for sale, partially the company reached an agreement with the supplier to replace or return them.


Management of accounts receivable


The company’s objective is to minimise them and to control timeliness of payments. The major instruments, which are applied in this process, are negotiations, personal meetings and signature of debt restructuring agreement, if necessary. The objective of the Financial Directorate is to determine the scope of the funds required to timely implementation of projects and orders. Outstanding indebtedness appears through no good will of the customer. Today, the situation is difficult to both manufacturers and consumers of goods and services. Nevertheless, there is a way out even from the most difficult situation. The customer must understand that debts may result in delays in manufacture. When accounts receivable emerge, we should, as the case may be, either agree to suspend the terms of payment or sign restructuring agreements, i.e. divide the payments into parts and fix the debt repayment schedules.


Management of accounts payable


Existing of outstanding debts not repaid by the company is not less risky that debts to the company itself. Therefore, accounts payable should be strictly controlled. It is important to understand that partners interact with each other, which means that they have common interests and plan to cooperate in the future.


Delays in payment for a period of 120 days are another interesting instrument, which enables to manage accounts payable in an efficient way. These figures may shock. In fact, this practice is widespread in the world: it is applied by the world largest manufacturers. The bench marketing research shows that a delay of up to 230 calendar days is a general practice. The advantages for both parties arising from this scheme are obvious: the supplier secures his sale market and the guarantee to receive money within the agreed terms.


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