How we eliminated cash deficiency by means of a payment schedule

Situation

A famous retail company asked for assistance in elimination of cash deficiency.

The flow of money seemed to be present, but the current assets were constantly lacking.

Solution

1. We made a calculation: having a turnover of EUR 80,000 per month, with a correction of payment due dates more/less than 10% on suppliers and customers, the company can gain 20% of current assets.

Having examined the company’s conditions and terms of payments, I’ve made the following correlation.

On average, payments from customers were performed in 10 days. We’ve noted that.

We’ve talked to those who paid later and explained that because of their late payments during two years we have to strictly set the term of their payments. (Normally, the clients are ready to continue purchasing from us, that’s why they accepted such conditions.)

2. The next step of the payment schedule implementation: a designated person of the company was obliged to control the incoming receivables. As soon as a payment term expired, a customer received a reminder – “you haven’t paid”. And within 2-3 months the payment schedule was normalized, and the money came exactly on the 10th-11th day.

What is the result? I had some cases when formally the term was 10 days and in fact, the customers made payments on the 25th day. After negotiations we decreased this figure down to 18 days – and that was 25% of money that turned over in the business.

3. At the same time we consider what we can get from suppliers. Normally, they are ready to make concessions because they are interested in sales. If instead of 7 days we manage to postpone payments to 10-14 days, we’ll have matching receipts and expenditures.

As a result, we obtain +10-20% of an extra possibility to receive a delay and the customers are deprived of it. It is not even necessary to put your own money into the business, you can work with someone else’s.

Result

• The company obtained the possibility to control when and what money is received and expended.
• This fairly simple action allowed the NN company to save 20-25% of current assets on the part of the customers which can be spent on the development of other focus areas. On the part of the suppliers, it is also the same 20% because the first payment makes usually 50%.
• In fact, this simple instrument allows the company to exist at the expense of other people’s means and develop new focus areas without risks and additional investments.