Current asset management in the enterprise

Chapter 3. Recommendations for the management of current assets on of SPETSSTROY-SVYAZ Ltd

3.1. Ways to improve the cash management

Cash flow planning
One of the stages of cash-flow management is the planning stage. Cash flow planning helps financial manager to identify the sources of funds and to assess their use as well to identify the expected cash flows, and hence the growth prospects of the organization and its future financial needs.
The main task of scheduling the movement of money is to check out the reality of income sources and validity of expenses, synchronicity of their of occurrence, to determine the possible need for borrowing. Plan of cash flow can be made in direct or indirect way.
In addition to the annual plan of the cash flow it is necessary to develop a short-term plan for short periods of time (month, decade) in the form of payment calendar.
Payment calendar is a plan for the organization of production and financial activities in which all sources of revenue and expenses over a certain period of time are calendar linked. It fully covers the cash flow of organization, provides an opportunity to link the cash receipts and payments in cash and cashless; helps to ensure constant solvency and liquidity.
Payment calendar is constituted by financial service of enterprises, with the targets of the budget cash flow divided by month and smaller periods. Dates are determined on the basis of the periodicity of the main payments of the organization.
In the process of payment calendar the following tasks are performed:

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  organization of accounting of time matching of receipts and future expenses of the organization;
  
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  creation of database of cash inflows and outflows;
  
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  daily records of changes in the information database;
  
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  analysis of non-payment and organization of activities for elimination of their causes;
  
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  calculation of the need for short-term financing;
  
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  calculation of temporary free funds of the organization;
  
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  analysis of the financial market from a position of the most reliable and profitable investment of temporarily free cash.
  

Payment calendar is compiled on the basis of real information database of cash flow of organization, which consists of: agreements with contractors; acts of verification of payments to contractors, invoices, bank documents on the flow of money to the accounts; money orders, products shipping schedules; schedules of salary payments, the state of settlements with debtors and creditors, the legally prescribed time of payments for financial obligations to the budget and extra budgetary funds, internal orders.
For effective calendar of payments preparation financial manager need to control information about the cash balances in bank accounts, money spent, average balances for the day, the state securities market of organization, planned receipts and disbursements for the period ahead.
The result of the development plan, cash flow can be either a deficit or excess of cash. Therefore, the final stage of cash flow management they are optimized by balancing the volume and in time, synchronizing their formation in time and optimizing the balance on current account.
Both deficit and excess of cash flow have a negative impact on enterprise. Adverse effects of the deficit cash flow appear in the reduction of liquidity and solvency, growth of overdue accounts payable to suppliers of raw materials, increase in the share of of overdue debt on received financial loans, delayed payment of wages, increase the duration of the financial cycle, and ultimately - in the reduction of profitability of use of its own capital and assets of enterprises.
Adverse effects of excess of cash flow occur in the loss of the real cost of temporarily unused cash by inflation, the loss of potential revenue from an unused part of the monetary assets in their short-term investments, which eventually also affects the level of return on assets and equity enterprise.
According to I. Yakovleva⁸, the amount of deficit of cash flow must be balanced by:
1) Attracting additional own or long-term debt capital;
2) Improving work with current assets;
3) Disposal of non-core fixed assets;
4) Reduction of the investment program of the enterprise;
5) Cost reduction.
The volume of excess of cash flow should be balanced by:
1) Increasing investment activity of the enterprise;
2) Expansion or diversification of activities;
3) Premature repayment of long-term loans.
In the process of optimizing of cash flows over time there are two basic methods - the alignment and synchronization. Alignment of cash flow is aimed at smoothing their volumes by separate intervals of the period of time. This optimization method allows to eliminate to a certain degree the seasonal and cyclical variations in the formation of cash flows (both positive and negative), to optimize parallel average cash balances and increasing liquidity. The results of this optimization method of cash flows over time are evaluated using standard deviation and variation coefficient that should be reduced in the optimization process.
Synchronization of cash flows is based on the covariance of positive and negative types. During synchronization there must be ensured improved correlation between these two types of cash flows. The results of this optimization method of cash flows over time are estimated using the correlation coefficient, which is in the optimization process, should aim to value of +1.
Tightness of correlation is improved by speeding up or slowing down of payments.
Payment transactions are accelerating by the following activities:
1) Increasing the size of discounts to debtors;
2) Reducing the term of trade credit extended to customers;
3) Tightening of monetary policy on the collection of debt;
4) Tightening procedures for assessing the creditworthiness of debtors with purpose in reducing the percentage of insolvent buyers of organization;
5) Use of modern financial instruments such as factoring, discounting bills, forfeiting;
6) Use of such types of short-term loans as overdraft and credit line.
The slowdown of payments may be carried out by:
1) Prolongation of trade credit granted by suppliers;
2) Acquisition of long-term assets through leasing, as well as transfer to outsourcing of strategically less significant parts of the organization;
3) Transfer of short-term loans into long-term;
4) Reducing the payments to suppliers in cash.
Cash as a form of current assets is characterized by certain attributes:

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  Routine - funds are used to pay current liabilities, therefore, between the incoming and outgoing cash flow there is always a gap in time. As a result, the company has to constantly earn free money to a bank account;
  
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  Precautions - activity of the company is not tightly regulated by nature, so cash is needed to cover unexpected of payments. For these purposes it is expedient to create a safety stock of cash;
  
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  Speculative - cash is necessary for speculative reasons, as there is always a little likelihood that suddenly there will appear an opportunity for profitable investment.
  

However, cash itself is a nonprofit asset, so the primary objective of the policy of its management is keeping it at the lowest appropriate level, sufficient for effective financial and economic activities of the organization, including:

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  Timely payment of suppliers' invoices, allowing to use offered discounts on the price of the goods;
  
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  Maintain a constant creditworthiness;
  
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  Pay unforeseen expenses arising in the course of commercial activity.
  

As noted above, if there is large money the current account organization suffers opportunity costs (refusal to participate to any investment project). With a minimum stock of cash there are costs for replenish the stock, so-called maintenance costs (selling and distribution expenses resulting from the purchase and sale of securities, or interest and other costs associated with the involvement of a loan to replenish the cash balance). Therefore, solving the problem of optimizing the balance of money to the account, it is useful to consider two mutually exclusive things: maintaining the current pay and receiving additional income from the investment of available cash.
3.2. Ways to optimize the management of accounts receivable
Accounts receivable is an important part of enterprise assets. It should be noted that its share in total assets of the analyzed company on 1 January 2010 was 63%. Therefore the construction of an effective management system accounts receivable and its stable functioning are among the most important areas of enterprise management.
Table 3.2.1. Dynamics of accounts receivable for 2005-2009