Cash Flow Management in Retail Chain - Essay Example

?Cash Flow Management in Retail Chain Introduction ‘Cash flow’ is an operational problem common to most of the industrial and business undertakings. The perennial problem in a Retail Chain company with major portion of the sales on credit basis, faced by our team in the Finance Department of the company is cash flow management. Any mismatch in cash flow will severely affect the retail business. The cash flow in retail industry is a very dynamic phenomenon and apart from solving the operational problems as and when they arise, it is also important to arrest the causes which lead to the problem simultaneously to keep control over the situation at all times. Identifying and resolving the problems not only involves interaction with the purchase, sales, credit collection or other divisions of the company, but also managing the entire control systems, communication at all levels effectively and efficient planning and forecasting. It is also important to note that profitability to a greater extent hinges on efficiency in working capital management, especially in the retails industry. The empirical findings of the study made by Samiloglu & Demirgones (2008, p. 44) show that account receivables period, inventory period and leverage affect firm profitability negatively. The following proposals outlined for the resolution of the operational problems with reference to cash flow covers comprehensively all the facets of the business which are connected to it directly and indirectly in the company. However, leadership qualities in the organization and the policy of the organization in connection with the development of leadership qualities among the mangers are fundamentally very important for sustainable development. Properly identifying the different styles of leadership in an organization for developing it through motivation is very important for success in any organization. Krishnaveni & Ramukumar (2006) state “A person's behavior is the outcome of several factors or motives. Motivation is one of the important factors affecting human behavior”. Leadership development According to Greatman theories, leaders or born and not made. However, the most important qualities of leadership, honesty, competency, inspiring, intelligence and forward looking signify that the above statement could be true only partially, and the leadership qualities can be acquired through proper training and willingness on the part of the person to learn. For the finance professionals in cash management, honesty and forward looking qualities are very important so that the person can guide his team to achieve the objective by proving intelligent solutions at crucial times thereby inspiring the team members in the achievement of the objectives. According to traits theory, people inherit certain traits and qualities to become leaders. This is at the best a variation of the Greatmen theory. Contrary to this, behavioral theory believes great leaders are made, and this is in line with the strategy to be adopted in an organization for leadership development, because, the usefulness of the former theories are restricted to recruitment level, and persons need to be developed or molded to suit the purpose for which they are selected. According to contingency theory, a particular style of leadership suits a particular situation based on the variables relating to the environment. Primary finding of a study made by Arbak & Villeval (2007, p. 24) reveals that a large proportion of subjects are willing to lead, though they earn on average considerably less than followers and even less than those in a group with no leader. Participative leadership is essential for success in cash flow management, because without participation and contributions from group members, decision making process goes haywire. The relationship theory is very relevant and important in the day-to-day operations. The connection between the leader and the followers is developed through motivation and inspiration. This is very relevant in the working capital management as it involves high ethical and moral standards and useful for maintaining cordial interpersonal relationship Kocher, Pogrebna & Sutter (2009, p. 25) in their study found that the majority of the leaders adopt situational leadership by making both autocratic and democratic decisions. The manner in which the leader is determined appears to be important and the border line is very thin in respect of the working capital management where there is little room for procrastination. Planning Mohamad & Saad (2010, p. 140) states that the management of working capital necessitates short term decisions in working capital and financing of all aspects of both firm’s short-term assets and liabilities. Planning is the fundamental requirement for any organized activity or business, and proper planning is essential to be prepared in meeting the problems in cash flow management due to operational issues. Sen & Oruc (2009, p. 110) states that efficient working capital management includes planning and controlling of current liabilities and assets in a way it avoids excessive investments in current assets and prevents from working with few current assets insufficient to fulfill the responsibilities. The justification for centralized or decentralized planning is dependent on the economic benefits arising out of each activity weighed in relation to the process. Therefore, opportunities need to be explored in relation to the operational problems of cash flow in this context. Decentralization of operations in certain areas, for example, procurement of vegetables available locally to the respective retail stores may lead to savings in cost and efficiency. Ramsay & Haworth (1989, p. 292) states “Sophisticated managements may decentralize particular functions even within global structure, and one good candidate for this is personnel”. The additional and uneven stress that may be involved in the management of supply chain and its impact management of cash flow could be reduced through proper planning. Supasansanee & Kasiphongphaisan (2009, p. 8) state “While the information system eases the integration, the success on building competitive advantages in chain is relied upon people and process”. A leader who is successful in marketing for instance may be a failure in planning and vice versa as envisaged in contingency theory. Planning needs meticulous attention to details. Forecasting Continuous changes in the form of assets in terms of the components of working capital on account of rotation in the retail chain necessitate forecasting. The amount locked up in stocks to-day is getting converted into receivables to-morrow. Whereas, to meet the demand, the stock needs to be replenished which create imbalances, unless the receivables are converted into cash and then to stock on a regular basis. Gilliland states “Modern demand-forecasting systems provide new opportunities to improve retail performance. Although the art of the individual merchant may never be replaced, it can be augmented by an efficient, objective and scientific approach to forecasting demand”.  Any mismatch in the process should be identified well in advance to rectify the imbalances in the supply chain. The demand pattern in the retail industry is not constant. For example demand in the beginning of the month which coincides with the salaries of the people would be high. Similarly, credit collection at this period will be high. Wilson & Miller (1998, p. 28) state that the data necessary in preparing a forecast may come from within the business and/or may be external. For instance, demand during Christmas season could be extraordinarily high or low compared to the economic situation. Therefore, investment on stock should be regulated in tune with the prevailing market conditions, and finance arranged wherever necessary to ensure availability of stock. Therefore, forecasting techniques need to be developed in the organization based on various parameters and the past history. According to behavioural theory of leadership people can learn or can be trained to become leaders. Forecasting needs thorough knowledge and training on various factors that may have impact on plans. Knowledge, experience and intuition are the important variables that need to be identified and aligned in respect of leadership issue in this discipline. Cash budget To avoid mismatch in receipts and payments in the cash flow management, the system of cash budget needs to be in place, so that the various commitments relating to salaries, payables, establishment charges such as electricity, water and rent could be met without undue pressure. Cash budget prepared for a year, broken down to months and weeks reveals the gaps. This will enable the management to make arrangements for the finance required or utilize the surplus cash available properly. Also, comparison with the historical statements could reveal the trend over the period of time. It also facilitates adjustments in the movement of cash to the next week or next month based on the actual movements during the period. The participative leadership quality is important in budget control as inputs from various divisions need to be collected assessed and decisions made in the process. Strategic controls in working capital management The operational issues in relation to cash flow management are not restricted to making the finance available for the business. It encompasses a wide range of strategies involving efficiency in the use of capital and reduction in cost. The strategies should be evolved for a sustainable growth and development in the long run. Pirvutoiu & Popescu (2009) state that working Capital is a useful indicator in financial management because it reflects how much cash the business has to meet its obligation. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short term debts and upcoming operational expenses. The Controller of Finance (CoF) needs to use several techniques and tools to improve the overall performance. The quality of the leadership of the in working capital management is very important, since the bird’s eye view of the business encompassing system controls, built-in safety mechanisms, weaknesses and other factors related to the business as a whole is very important for achieving the objectives. Duygulu & Ciraklar (2000, p. 398) found that “leadership roles are under the influence of organizational conditions i.e. management practice, working conditions, the perception of members and the characteristics of tasks”. Apart from maintaining good relationship with the subordinates, the capacity of the leader to inspire and motivate the followers by high ethical and moral standards is very important. Turnover of capital The efficiency in the use of working capital could be measured by the ratio of turnover to working capital. Comparison with the historical data or competitors workings would reveal the inherent strength or weakness on further probe. Ramachandran & Janakiraman (2009, p. 71-72) state that there is a strong (–)ve relationship between variables of the working capital management and profitability of the firm (Reheman 2007). This means that as the cash conversion cycle increases (c c c), it will lead to a decrease in the profitability of the firm, and managers can create a +ve value for the shareholders by reducing the c c c to a possible minimum level. Inventory holding period Interest is an important element in the cost of the products sold in retails stores, for that matter any business. The goods sitting in stock for a longer period of time simply increases the cost of interest which is directly in proportion to the increase in inventory holding period. Apart from the interest element, there are other issues such as deterioration in quality and product expiration issues which will affect marketability of the products. Also, this will result into storage problems as it affects availability of shelves for the new products. Eventually, in long run it will have negative impact on cash flows. Efficient control over procurement, transportation and arrivals as in the case of ‘just in time’ inventory management will reduce the investment on stock considerably. Credit control Collections not materialized within the credit period will add to the interest cost on the funds locked-up and causes uncertainty in cash flows which calls for effective credit control mechanisms and continuous review of the outstanding positions. Gill, Biger & Mathur (2010, p. 8) state “Previous research predicts negative relationship between accounts receivables and corporate profitability. Our results are in line with these findings. The finding indicates that slow collection of accounts receivables is correlated with low profitability.” Situational theory of leadership is called for in the case of credit control, because the credit controller has to deal with the different customers in different manner taking into account so many factors involved in the relationship and the situations. Credit period Fixing period of credit allowable to various types of customers based on the factors such as volume of business, consistency in order placement, cash or trade discounts allowed and payment history is closely linked to the credit control strategy which need periodical revisions in tune with the developments taking place. The average collection period is calculated as follows: Accounts Receivable _____________________ Average Daily Credit Sales This could be compared with the payment terms, past history and industry average for better control and taking corrective measures. (Bizmove.com) Analysis and Reporting Regular analysis, review and reporting are important to take corrective steps on time to improve efficiency in the system. For instance, analysis such as ABC analysis of inventory and age wise analysis of debtors will reveal the weaknesses in the system, and corrective actions such as discount sales or stock clearance sale could be taken based on the analysis. Participative qualities of leadership are called for collection of information and reporting. ABC Analysis For instance, if a major portion, say 90 percent of the investment in stock is made on selective number of products which may constitute, say 10 to 15 per cent of the total number of products, concentration on procurement, storage and sale of these items would improve efficiency in the operations and result into savings in cost which will lead to improvement in cash flow. Pierre, Vannieuwenhuyse, Dominanta & Dessel (2003, p. 2) state that this analysis consists in classifying items into three classes (A, B and C) according to their contribution to the total number of order lines. The few A-items (10 percent of items), also called fast-movers, have the highest numbers of order lines among all items, whereas the numerous C-items (70 percent of items), also called slow-movers, have the lowest numbers of order lines. The idea is to exercise more control based on the relative impact of the investment in stock on cash flow or working capital. Age wise analysis of debtors This analysis enables the credit controller to compare the position with the earlier periods and with the established norms in the industry. The credit controller can concentrate his efforts on the overdue cases and take appropriate actions which may include legal steps necessary to recover the payment. Data Management, Information and Reporting System Clegg (1989, p. 38) Adoption of computer technology enabled the development of retail outlets in which efficient machine operators could handle financial advice, using terminals connected to central computing facility at a location remote from the branch. There are various tools available to the businesses for improving the information and reporting system in line with the latest developments in software technology and telecommunications to function on real time basis. For instance, Geographic Information Systems (GIS) is widely used by the retail industry for its relevance in operational issues. Mishra (2009, p. 54) states “retailers in US and Europe widely use census data and GIS software to understand their customers, analyze their competitors, evaluate current market position, identify optimal expansion and for innumerable other benefits”. Proper periodical reports with reference to the operations, that is daily, weekly and monthly will lead to efficiency by taking preventive measures to avoid disruption in the chain. Transmission of information on real time basis is important in working capital management which underlines the need for effective leadership. Also, according to Meidinger & Villeval ( 2002) the ability to transmit information credibly within team is a key feature of the efficiency of interactions and can contribute to explain the preference for horizontal teams over hierarchical ones. Customer Relationship Management (CRM) According to Wahab & Ali (2010, p. 92), the traditional CRM approach has evolved over the period of time using tools, such as internet, website, and wireless into the e-commerce applications. In the case of retail industry the CRM techniques are increasingly used not only for maintaining relationship with the customers focusing on the customer profile, their preferences, their spending pattern, tastes and fashions and income levels for the growth of the business, but also for focusing attention on optimization of working capital, costs reduction, efficiency in sales and organizational and process improvement. Wu and Wu (2005) stated that customer relationship management (CRM) had replaced the traditional 'four Ps' of marketing - product, price, place, and promotion. Long-term relationship with the customers is the key to stability in an increasingly dynamic market. Conclusion In spite of strategic planning in respect of working capital and cash flow management, need for additional finance arises in the retail business due to various reasons. Basically, long term suppliers would extend credit facilities to meet the increased or additional demand usually as it is beneficial to them also. Open cash credit arrangement already existing with the bank is very flexible in availing facilities to the extent required for the operations. Considering the sound financial position of the company in terms of current ratio, Current Assets to Current Liabilities which is 2:1, financial arrangement in exigencies during peak season during December and January of the months of the year is not a problem as in the case of earlier years. However, the focus of this paper is to improve overall efficiency in cash flow management by revamping our strategies related to working capital and become less dependent on external finance for the operations thereby reducing the interest cost to be competitive in the market and improve profitability. The proposals broadly as outlined in the paper need to be reviewed by a committed to be formed for implementation, after taking into account the various issues discussed, in the context of our business. References Arbak, E. & Villeval, M. C., 2007, ‘Endogenous Leadership: Selection and Influence’, Discussion Paper No. 2732, April 2007, The Institute for the Study of Labor (IZA), Bonn, Viewed 20 April 2011, ftp://repec.iza.org/RePEc/Discussionpaper/dp2732.pdf Bizmove.com, Credit and Collection Methods, Viewed 14 April 2011, Clegg, S. R., 1989, Sociology of Class and Organization, Organization Theory and Class Analysis: New Approaches and New Issues, Ed. Clegg, S. R., Pub. Walter de Gruyter. 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