• Most organizations sell multiple products rather than a single product. They need to have pre-defined plans in respect of each of the products they market. A trading, organization would plan for the type of products to trade in, if not the specific brands. A manufacturing company should make plans on the different technologies and innovations they will use for the manufacture of a range of products. Service organizations should plan in advance for the types and modes of services to be provided. Whatever the plans made, organizations should adhere to them in producing and marketing their merchandise.
• After selling a product mix over a period of time, you would come to identify the most profitable products/services, in addition to quite profitable, not so profitable and also the unprofitable items. Selling the most profitable products only would maximize revenue provided they could be sold in reasonably large quantities.
• A sale is said to be complete only after the money is realized. If you took too long to collect debts, your cash flow suffers depriving you of much needed working capital for maneuvering the business well. Select customers who pay on time and sell as much as possible to them. However, keep in mind that selling to a customer who does not pay fast, but buys in very much larger quantities could sometimes be more profitable to you. Hence you need to be more analytical in deciding on   which customers to target most.
• Identify the products/services that contribute the highest margin per unit towards your fixed overhead, and maximize their sales. Don’t forget that it is ultimately this margin that contributes to your cash flow as well.
• If market research indicates that there is a better demand for your products compared to those of your competitors, it is a positive case for raising your prices. Conversely, if the demand for your products is slack in the face of stiff competition from other contenders, consider reducing your prices to gain an advantage on them. Encourage customers to buy in larger quantities by granting volume discounts.
• At times of high inflation and rising prices, your sales could be giving a false picture of improving sales year after year when in actual fact you may be selling less. In order to be correctly informed, record the quantities too alongside your net sales figures for the organization’s internal use. If you look after the unit sales or quantities well, the sales amount will just fall into place.
• In respect of products enjoying a high demand and especially with regard to seasonal and customized products, you are at an advantageous position to negotiate for advance payments from customers to reserve their requirements and ensure continued supplies.  Apart from its cash flow benefit, it facilitates the planned production to actual customer requirements. Customers who are noted for delaying payments may be asked to keep a sizable deposit on a continuous basis or face the possibility of being refused supplies. Alternatively, customers could be asked to make progress payments so as to keep a margin at a fixed percentage on their outstanding order values as at any given date. Progress payments could also be arranged so as to cover all debts except those falling within 30 days.
• Sales of small values should not be given on credit, since the costs of invoicing, following up and collecting would far exceed their profit margin. Consider giving cash discounts to encourage cash sales at all times.

The board of directors of a company may have a variable policy with regard to its dividend payments, or may opt for a consistent policy over a long term. Basically, the board has to decide between paying out a dividend to keep its shareholders happy in the short-term; or retaining the profits for re-investment for further expansion of the company. In making this decision, the company may also take into account:

• if the quantum of the dividend payment is compatible with their ready cash availability. A possible alternative to keep to your goals while satisfying the shareholders too is to issue company stock in lieu of cash dividends. A disadvantage is that it would result in the sudden drop in the company’s EPS (earnings per share).
• that paying a constant dividend serves as a positive signal of the company’s current good health to the share market and the outside world. Paying an increased dividend indicates the board’s confidence that it could be maintained into the future too.
• investors tend to prefer a company retaining and reinvesting dividends instead of paying out at times of high taxation on dividends compared to capital gains;
• that you need to either cut down on your investment programs or borrow from external sources to fund the dividend payment at times of constrained and/or reserved cash flow. Microsoft Corporation, for instance (founded in 1975) that went public only in 1986 never paid cash dividends until 2003. The principle behind this thinking would apply more aptly to fairly new and fast expanding companies.

To sum up, features of a proper system of company equity management would comprise:

• Controlled issue of new stock as and when necessary for raising additional funding for ambitious investment projects.
• Maintaining a steady or continuously growing EPS and DPS (dividend per share) or a constant DPR (dividend payout ratio – as a percentage of earnings).
• Some companies may maintain both ratios simultaneously; that is, a constant or a steadily increasing DPS ratio as well as a constant DPR. This is very much characteristic of large mature companies in the food industry like Tootsie Roll and Kellogg.
• Maintaining a steady or increasing SP (Share Price) for its stock. Conversely, cutting back on dividends adversely affect the SP. For example, many companies in the US automobile industry did not reduce their dividends since 1990 despite the recession until their EPS became negative. General Motors went on increasing the dividends until forced to cut back in 2006 after making substantial losses for two consecutive years.
• Issuing bonus shares to all shareholders or directors or both.
• Issuing discounted shares to directors or employees or both.
• Not making dividend payments especially in the initial years with a view to reinvesting same in the business for future growth.

Borrowing may be done through equity financing or debt financing. Equity financing is generally done to get a company off the ground although it may be resorted to at times of a major expansion. A company for its intermittent special cash needs would raise debt by issuing debentures and various types of bonds although the more popular form of debt financing is through banks and other financial institutions. Most lending institutions lend for all purposes without discrimination while some specialize in lending for specific purposes only.

Borrowing is not necessarily a sign of financially instability. The healthiest of corporations too carry some level of indebtedness to lending organizations. Some loans carry significant tax concessions on the interest or the principal components or both. Take advantage of institutions that lend for specific purposes at concessionary rates of interest. If you are borrowing for adding motor vehicles or plant and machinery, consider the option of leasing instead, with their inbuilt tax benefits. Never rush to borrow. Always borrow only the minimum required and as late as is practically feasible.

When borrowing, there are many factors that need to be considered carefully before deciding on your prospective lender:

• Obtain quotes from the best banks and reputed financial institutions for the capital required. Having segregated the best quotes, negotiate further on the rate of interest, other finance charges and all loan terms in general.
• If the project envisaged is expected to take some time before yielding income, search for a lender who agrees to deferrals on interest or principal, or both. Make sure that you provide for cash flow to meet repayments when installments start falling due.
• In order to have a safe working capital to play with, re-schedule whatever possible loans to be repaid over longer periods with smaller monthly installments. A disadvantage in spreading the loan over a longer period is the increase in the total cost of the loan to the organization.
• Make your ultimate choice of the prospective lender on the basis of an analysis of the total effective cost of the loan offered by each. This may be done by creating a realistic scoring system that assigns due weighting to the factors involved according to their level of impact on the finances and cash flow of your organization.  Study each package in detail with special emphasis on interest rate and all other financial terms including repayment period allowed with or without deferrals on interest and/or principal. Pay special attention to what is in small print. That is the area, which often contains the most restrictive or obnoxious terms (if any) of an agreement.
• Always match long term needs with long term loans. They will invariably be secured loans carrying more favorable interest rates and/or deferred payment terms. A disadvantage is the penalties imposed if you try to settle these loans earlier than as scheduled in the contact. As such, long-term loans should never be taken for short term funding requirements, and especially for those of a seasonal or short-term recurrent nature.
• Rolling the total interest payable over a loan’s entire life into the principal converts it to a bulk amount to be repaid over a specified period in equal installments. It makes the repayments easier to manage and work with. Additionally, it spreads the total cost too, uniformly over the life of the loan.

Avoiding prepaid expenses can help you in enhancing and maintaining a favorable cash flow. Prepayments generally occur when the period for which a certain payment is made, wholly or partly overshoots an accounting year. Subscriptions, vehicles licenses, all types of insurance payments, local rates and taxes, rents, leases and royalties comprise the most common accounts that are carried forward as prepayments. In such cases, consider making payments monthly, quarterly or bi annually instead of annually. It needs to be done wherever possible as long as the payments remain pro rata. However, If there is some benefit of a special discount or come other advantage accruing to the organization by making an annual payment rather than (say) 12 monthly installments or 4 quarterly payments, such cases would have to be considered separately on a case by case basis. Common examples of such situations are subscriptions for newspapers, magazines and periodicals and to professional institutions.

Deposits ( Deposits are liabilities for the bank!)  too are classified under current assets along with prepayments. However, unlike prepayments, deposits are most often mandatory and therefore cannot be avoided. The best you can do is to keep track of all recoverable deposits and call for their refund immediately their purpose is done or their period of validity expires.

Salary advances is another form of prepayment to be discouraged. Your employees could be educated on the benefits of taking a bigger packet home rather than drawing it in small installments.

Taxes generally come to big amounts. Missing to claim tax benefits on certain expenses or adopting an incorrect rate could cost you dearly in terms of cash flow. Due to this reason, taking every possible care in the accurate computation of your tax liability cannot be over emphasized. Overpayment of taxes arising from incorrect tax computations, once detected, invariably end up in a balance sheet as tax prepaid.

Acquisition of fixed assets should be accompanied with meticulous planning and attention to detail. At the inception, you may take advantage of market research already available for the industry to determine your probable share of the market segment. You may also do some research of your own, if necessary.  Target the barest minimum of fixed assets to achieve the desired level of production or output keeping a reasonable allowance for expansion. In estimating your requirement of fixed assets, consider the capacities and their respective costs involved. This could be further subjected to a careful consideration of the pros and cons of the following factors:

• Consider the option of building or fabricating the buildings/machinery/equipment concerned on your own or by employing contractors rather than purchasing from outside.
• Purchase used items instead of brand-new.
• Negotiate for the most favorable payment terms in all instances.
• Take on lease instead of purchasing outright to spread the investment over a larger number of years and to conserve working capital in the short-term.
• Consider the now popular chattel mortgages for motor vehicles, with their attractive tax and cash flow benefits.
• Consider renting space rather than building or purchasing building space.
• When it comes to replacement of assets (where you are already into the business for quite some time) consider refurbishment as an alternative to replacing with new items. Assign adequate weighting to the possible benefits accruing to the organization in virtue of advanced technology behind newer models as against the possible obsolescence of your existing ones.
• If your buildings are too spacious for your requirements, convert excess space to money by renting out. In the alternative, utilize excess space for undertaking sub contract work.
• Similarly, outsource or lease out underutilized vehicle/machinery/equipment capacities; or utilize them profitably for doing sub contract work for outside agencies.
• As you reach your optimized capacity utilization levels, don’t rush to purchase new fixed assets to meet additional orders. Try outsourcing and sub contracting out initially until new orders reach levels to warrant the consideration of any additions to existing fixed assets. The policy should be to defer new additions rather than advance them.
• Periodically monitor the efficiency of plant and machinery layout for maximizing production and minimizing production costs. Have a system in place for the constant monitoring of capacity utilizations of all plant and machinery. This will help you in the timely detection of any idle, underutilized or redundant equipment as well as white elephants (if any).
• Dispose of all excess and uneconomical fixed assets.

• A sound system of fixed assets managements should take in to account the accident proneness and possible hazards faced by their operators and others who have to move in their immediate vicinity. Have all necessary safety precautions also incorporated at the time of installation itself of new plant and machinery.
• All motor vehicles, fixed plant and machinery as well as all movable or immovable equipment etc. should be assigned to the care of one or more specified employees. Those specified employees should be held responsible for maintaining them in good order by adhering to proper and timely maintenance schedules. The whole operation should come under the surveillance of a senior engineering manager.

Features of a well-managed system of accounts payable would include:

• A built-in system of good internal checks and controls in place to ensure that a single person does not handle more than one task down the line in disposing of an account payable from its start to end. Relevant documentation for payments should be prepared, checked, certified and authorized by different authorized officers at different levels. The key stages of discharging a payable account comprise of raising a purchase requisition followed by a purchase order (by two different departments), raising a goods received note at point of receipt of goods, QC report certifying that the goods are up to the required standards, receipt of supplier’s AD and Invoice, entering the purchase day book, posting to creditors’ ledger individually and to the general ledger control account in total to create the liability or accrual (by two different persons), compilation of a payment voucher a few days in advance of due date, checking, certifying, authorizing, drawing check, posting cash book entries and creditors’ ledger and general ledger postings once again to record the payment.
• A computer-generated system incorporating all above features is preferable although not essential.
• The Officer preparing payment voucher should match supplier’s AD and Invoice with purchase order, and the GRN with QC report. These documents would establish that the payment is prepared in accordance with quantities received in good order at approved prices and on agreed credit terms. If a relevant short list of authorized prices could also be annexed, it would help satisfying those concerned that the purchase order too contains no errors.
• If all the above documentation is in order, three different authorized officers at different levels at different stages will check, certify and authorize the payment voucher and pass it on for payment. Again this workflow process may be different for different firms.
• So much for an efficient payment procedure. Additionally, the organization should have clear cut policies too, especially with regard to the following:
  • Call for quotations from several suppliers, negotiate, and award to the best supplier not only with regard to price but also taking into consideration quality, quantity and cash discounts, reputation, reliability, lag time etc.
  • Never pay earlier than due date except for a very special reason.
  • If you have to go slow on payments, do so only with the awareness and concurrence of the supplier.
  • The system you have should make funds available in time for payments. You may reserve a particular day or two per week for payments instead of every day.
  • Ensure that you purchase what are essential according to minimum stock levels to be maintained, and do not overstock unless for a special authorized reason. Have your cash flow in mind in formulating ordering and purchasing policies. Try to curtail purchases wherever possible.
• If you get any supplier to agree to a bartering arrangement rather than for payment, it would be like being armed with a double-edged sword.
• Remember that there is a higher processing cost attached to credit purchases. Hence, fix a minimum level in cash value for credit purchases. Channel all lower value purchases on a cash basis. This would help slacken the pressure on an already heavily burdened credit purchase system.

Presuming that the creditor organization is no longer interested in pursuing the collection of the debt through any in-house debt collection unit (if they have one at all), it may exercise the option of outsourcing the task to an external debt-collecting agency. A Debt Collection Service should not be confused with a Factoring Service that undertakes the collection of only live debts on which they pay you an advance too amounting to as much as 90% of the total debt. Conversely, debt collection agencies undertake the collection of bad debts generally on a “no collection, no fee” basis. A creditor organization has nothing to lose by outsourcing the bad debt collection to a third party. In the majority of cases, the debt is already removed from the books of the creditor organization by the time it is outsourced.

Debtors have been given much protection through the Fair Debt Collection Protection Act (FDCPA) of 1977 against forcible and unfair extractions by the creditors or their agents. Debt collection agencies are professionals learned in the relevant laws, procedures and the art of debt collection. They can come up with multiple strategies for effective collection depending on the nature of the dept and the debtor. Bad debt collection is highly time consuming with planned follow up action to be pursued at required time intervals with many records too to be kept accurately in case the debtor has to go to litigation one day to obtain settlement. Hiring a debt collection service is the only wise move to make in the said circumstances.

With a professional firm handling your irrecoverable debt collection on your behalf, you can stay focused on the more important aspects of your business without having to worry about past-due debt collections too. These debt collectors who are well trained for their job will know how to do a far better job of recovering as much debt as possible while being courteous and respectful and maintaining good relationships with the debtors concerned. They will keep you out of possible prosecution for breaching FDCPA regulations through your professional ignorance.  You are also freed from the additional responsibilities, expense and risks involved in the alternative option of employing an in-house debt collector. They have all the incentive to try to recover the best they could as they work on a commission basis.

Here are some points to ponder before hiring a good debt collector.

• Find out their terms of reference, charges and fees. Do a survey to ascertain their market competitiveness. Try to obtain evidence of their officers’ knowledge of local laws and regulations applicable to third party debt collections.
• Ascertain how long they have been in business and obtain a list of previous achievements with names of debtors and creditors concerned with the relevant particulars of the nature and amount of debts collected with time taken. Compare them with your present job assigned. Request for references for further verification.
• Their capacity for good rapport with your debtors could go a long way in getting a higher collection within a shorter period and at a lesser opportunity cost than doing on your own.
• Some collectors tend to use strong-arm tactics to extract maximum from debtors for the sake of earning high commissions. Such actions by your agent could eventually leave you with ruined customer relations, a bad reputation in the industry and possible litigation for violations of regulations as well as personal damages.