About the financial cycle, or "Where is the money, Zin?"

In one of the companies we helped, an economist monitored accounts receivable and accounts payable, loans and stocks - the main eaters of working capital. According to his calculations, everything should have been fine, but in reality there was always not enough money, and the company, as usual, increased loans.

The problem lay in what kind of stocks they were and what kind of accounts receivable. In the balance sheets of companies, this indicator is usually reflected in a single value, for example, five million. But the accounts receivable are different, these five million can include both live, working accounts receivable, and problematic, for example, courts with clients, delays, or even irrevocable, existing only on paper, when the debtor has been bankrupt or disappeared for a long time. Stocks are also different. Something will really soon go into production or sale, but most often there is a lot of dust in the warehouses of any Russian company that cannot be sold even with substantial discounts. Formally, these are current assets, but in fact – either zero or so.

Stocks are also different.

We proposed discounting accounts receivable and inventories, that is, taking them into account in the management balance sheet not at face value, but taking into account the probability of return to turnover. For example, to estimate a non-refundable debit at 0 rubles, a judicial one at 50% of the nominal value, etc. We did the same with stocks. And then it became clear that real current assets are significantly less than liabilities, which is exactly what generated the eternal money hole.

In many Russian companies, financiers only state "posthumously" the facts of "profits, receivables and payables, stocks, etc., but are unable to influence these figures. Accounts receivable are affected by the commercial director, inventory – buyers or production. But neither the commercial director nor the production, as a rule, has motivation for the effectiveness of the financial cycle. They carry out sales plans, produce products, provide supplies, but most often they do not even understand how their actions affect the financial cycle. And the most unpleasant thing is that they don't want to understand. Owners are also often not interested in this. They are creative, inspirational people, their cheekbones are cramped from all this financial mathematics. And they, while they can, take loans to plug financial holes, so that they can be genuinely surprised later:where did all the money go?

Let's consider as a sample the real case of a manufacturing company with an average monthly revenue of 15 million rubles and a net profit of 600 thousand rubles a month kept a three-month stock of raw materials in stock. Gross profit (sales minus raw materials) was 40%, and, thus, 27 million rubles were always lying in the warehouse. At the same time, the company serviced a bank loan in the amount of 7 million rubles at a rate of 15% per annum, paying for it 1,050 million rubles a year of live money. The analysis showed that the stock can be safely reduced to 2 months, that is, by 9 million rubles. This money was put into circulation, which allowed the company to refuse the loan and increase its annual profit by 1,050 million rubles (or 14.5%). And at the same time get rid of the constant difficulties associated with obtaining and extending loans.

When we are faced with the lack of financial cycle management in a company, we always insist that a financier should not just appear in the company, but that this financier should be empowered to develop standards for inventories, receivables and payables, etc. And so that compliance with these standards affects the bonuses of the relevant officials. Or that at least the owner trusted him, this financier, and influenced his subordinates. Because in times of crisis, money is more important than profit. If you are unprofitable «on paper », but you have money in your accounts and you don't owe anyone much, you have a chance of survival. But if you have a paper profit, and your accounts are empty, you will probably have to invent a new occupation in the future. But only after you solve all the problems with creditors.

In times of crisis, money is more important than profit.

Finally, as promised, about when the excess of liabilities over assets is good news. For example, you are a federal network. Your accounts receivable is zero, since you are selling on prepayment. You know how to manage stocks, and they are small. But you can safely keep the accounts payable huge – your suppliers are ready to give you huge deferrals. In theory, the obligations should have been balanced by large account balances that the network would have accumulated. But what kind of business will just save money in the account? Chains invest them in opening new stores and sometimes develop without bank loans, which allows them to save on interest. However, whether you are a network or not, money cycle management should become an integral part of your management routine. Financial literacy, along with marketing, will become an important sign of a successful company in the coming years.