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Cash-Management Cycle

The concept of a cash-management cycle requires a segmented approach:

  • The first cycle is defined by the inbound operation of the company. It begins with the definition of the sourcing strategies and ends at the payment made to suppliers and with supplies available at the warehouse for manufacturing. This is the purchase-to-pay cycle.
  • The second cycle refers to the outbound operation. The manufacturing-to-revenue cycle is quite extensive and includes production, storage, and distribution of finished goods and the fulfillment of customer orders until the receipt of the invoiced value.

The integration of these cycles gives the visibility that the company requires for an efficient cash management of its operations.

Purchase-to-Pay Cycle

The activities of this environment happen without a fixed sequence.

The purchasing strategy is a broad discipline. Among other things, it requires strategic planning, risk management, analysis of economic and financial viability, and the strengthening of relationships. A long learning curve applies. The responsibilities are beyond the area of procurement planning (SNAR 01.01.01).

This building block is influenced by areas such as quality assurance, engineering, demand forecasting, inventory management, production planning and execution, research and development, and HE&S (health, safety, and environment). Purchasing has activities at strategic, tactical, and operational layers.

At the operational level, the interface with the cited areas of the company sets the order requirements. The order requirements are assumptions for the processes of supplier selection, negotiation, and contracting.

Note that both products and services are acquired, as are direct and indirect products, operational services (such as transport and storage), and administrative services (such as travel, health insurance, and banking). There is great diversity in the scope of selection, negotiation, and contracting.

The interface with the areas of demand planning, production planning, finance, and controllership defines budgeting and forecasting policies, practices, and actions. Forecasting the annual purchasing budgeting is quite a challenge because it impacts the forecasted cash flow and therefore the P&L (profit and loss) accounts.

There is also the ordering, receiving, any discrepancy management, and invoicing processes prior to cash management that involves the accounts payable team.

Figure 1.10 shows how these processes demand interactions within the organization. The image presents the SNAR Model and highlights the knowledge areas that either influence or are influenced by the purchase-to-pay cycle.

Figure 1.10

Figure 1.10 Purchase-to-pay cycle

Manufacturing-to-Revenue Cycle

This second cycle has a broader scope than the purchase-to-pay. It begins with the movement of materials for manufacturing areas and continues with the production of finished goods. Then it follows to the storage, order receiving and fulfillment, and the cycle of accounts receivable.

The customer strategy is a fundamental area or role that defines several segmentation strategies in customer service. This segmentation impacts the entire fulfillment process. This affects the planning of physical capabilities of the supply chain and the channels of data treatment and triggers the cost-to-serve patterns.

The sales management policies have some parameters that strongly affect the cost to serve. Topics such as drop-size tail, order entry, customer channels, service level, and customer tail are highly complex because there are numerous parameterizations. Closely related to sales management, it is the management of contracts, usually led by the sales team but followed by the customer service team.

This requires strong alignment between areas of supply chain, sales, and finance. Any flaw in this alignment will affect the demand response in three basic dimensions: reduction of sales volume, reduction of sales revenue per unit, increase of sales cost per unit. These dimensions are discussed in the next chapter.

Figure 1.11

Figure 1.11 Manufacturing-to-revenue cycle

The credit check policy tends to be defined by the finance, controllership, or accounting and represents an important filter in the order-entry process. Therefore, it can delay the speed from order entry to fulfillment or even indefinitely interrupt (cancel) the order.

Billing and cash collection are separated by the physical order fulfillment. That depends on warehousing operations, transport strategy, and distribution policies. The deliver confirmation at customer premises enables the cash-collection process to start. The longer it takes to deliver an accepted order, the higher the impact on the cash flow.

Integrated Perspective

The integration of these cycles enables the company to visualize what is needed for (ideally we should preserve the word “visibility”) efficient cash management of its operations. Figure 1.12 shows several knowledge management areas within the supply chain that influence the company’s cash-to-cash cycle.

Therefore, it is clear that supply chain management is not only about physical flows. In fact, the supply chain processes should align physical flows and information flows as a strategy to deliver the ultimate goal of capital maximization.

To deliver the right product at the right place at the right time with the right quality is necessary, but not enough. None of these add value to the business unless the cash-to-cash cycle delivers the financial results capable of satisfying shareholders. No organization survives without customer satisfaction. Customer satisfaction is a means, a strategy to enhance shareholder value.

The following chapters discuss how each knowledge area described in the SNAR Model contributes to the creation of shareholder value.

Figure 1.12

Figure 1.12 Cash-management cycle

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