Collections represents the ‘end’ of a sales cycle. It also represents the firm’s ability to convert cash expended from when a customer order arrives through fulfilment and payment. For many firms the operating motto in this area of working capital management is to simply try to collect faster. Few go beyond to address this ‘end of sales cycle’ activity that is the key provider of cash for the firm.
Collections management represents an opportunity to fully utilize a firms systems and resources. Leveraging simple technology is possible and enhanced through customer segmentation.
An ability to segment one’s customers, for the larger firms particularly, allows for differing policies and treatments when it comes to receivables management. Intuition plays a large part in determining the amount of investment required in a given relationship in most cases but this should be applied only to one segment of customers. Policies dictating the handling of other relationships may be drafted according to the resourcing and strategic requirements of the firm. Resources, electronic and otherwise, can then be planned for accurately given business cycles.
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COE-Partners
Architect of High Performing Organisations
Dear Mano,
the strive for max cash in the short term depends very much on the industry your firm is in and where in the ‘value chain’ your firm is situated and how much channel power the firm is able to command both strategically and otherwise.
Generally speaking, the closer your firm is to the ‘ground’ the more cash tends to be tied up in inventory. Having said that it may also be true, depending on policies currently in action, of firms ‘further away from the ground’ though.
The closer one gets to the end customer the higher the tendency for cash to sit in Accounts Receivables (AR).
Customer segmentation is a sub-activity within a series of activities that, when combined, will extract the most cash in the AR arena. For some firms their suppliers are also their customers and this warrants a slightly different approach to AR since AP (Accounts Payable) now also comes into play.
There is no particular reason to start the series, after the general article, with this article. If there are no request for particular areas to be addressed on a weekly or fortnightly (two weekly) basis then the articles will be released in a random order attempting to fairly cover the three primary areas of working capital management. If anything, the industrial world is awash with articles covering supply chain management – there is little focus, if at all, on the other areas of working capital management.
We’ll be happy to pay you a no-obligation visit to discuss your situation.
Hi Perry,
of all the different factors influencing working capital mentioned in your previous essay which one would you say is usually the most important one to get max cash short term? Is it customer segmentation? Or what is the reason to start your series with this one? Any hint for me?