Chapter 3. Recommendations for the management of current assets on of spetsstroy-svyaz Ltd

3.1. Ways to improve the cash management

Cash flow planning

One of the stages of cash-flow management is the planning stage. Cash flow planning helps financial manager to identify the sources of funds and to assess their use as well to identify the expected cash flows, and hence the growth prospects of the organization and its future financial needs.

The main task of scheduling the movement of money is to check out the reality of income sources and validity of expenses, synchronicity of their of occurrence, to determine the possible need for borrowing. Plan of cash flow can be made in direct or indirect way.

In addition to the annual plan of the cash flow it is necessary to develop a short-term plan for short periods of time (month, decade) in the form of payment calendar.

Payment calendar is a plan for the organization of production and financial activities in which all sources of revenue and expenses over a certain period of time are calendar linked. It fully covers the cash flow of organization, provides an opportunity to link the cash receipts and payments in cash and cashless; helps to ensure constant solvency and liquidity.

Payment calendar is constituted by financial service of enterprises, with the targets of the budget cash flow divided by month and smaller periods. Dates are determined on the basis of the periodicity of the main payments of the organization.

In the process of payment calendar the following tasks are performed:

• organization of accounting of time matching of receipts and future expenses of the organization;

• creation of database of cash inflows and outflows;

• daily records of changes in the information database;

• analysis of non-payment and organization of activities for elimination of their causes;

• calculation of the need for short-term financing;

• calculation of temporary free funds of the organization;

• analysis of the financial market from a position of the most reliable and profitable investment of temporarily free cash.

Payment calendar is compiled on the basis of real information database of cash flow of organization, which consists of: agreements with contractors; acts of verification of payments to contractors, invoices, bank documents on the flow of money to the accounts; money orders, products shipping schedules; schedules of salary payments, the state of settlements with debtors and creditors, the legally prescribed time of payments for financial obligations to the budget and extra budgetary funds, internal orders.

For effective calendar of payments preparation financial manager need to control information about the cash balances in bank accounts, money spent, average balances for the day, the state securities market of organization, planned receipts and disbursements for the period ahead.

The result of the development plan, cash flow can be either a deficit or excess of cash. Therefore, the final stage of cash flow management they are optimized by balancing the volume and in time, synchronizing their formation in time and optimizing the balance on current account.

Both deficit and excess of cash flow have a negative impact on enterprise. Adverse effects of the deficit cash flow appear in the reduction of liquidity and solvency, growth of overdue accounts payable to suppliers of raw materials, increase in the share of of overdue debt on received financial loans, delayed payment of wages, increase the duration of the financial cycle, and ultimately - in the reduction of profitability of use of its own capital and assets of enterprises.

Adverse effects of excess of cash flow occur in the loss of the real cost of temporarily unused cash by inflation, the loss of potential revenue from an unused part of the monetary assets in their short-term investments, which eventually also affects the level of return on assets and equity enterprise.

According to I. Yakovleva⁸, the amount of deficit of cash flow must be balanced by:

1) Attracting additional own or long-term debt capital;

2) Improving work with current assets;

3) Disposal of non-core fixed assets;

4) Reduction of the investment program of the enterprise;

5) Cost reduction.

The volume of excess of cash flow should be balanced by:

1) Increasing investment activity of the enterprise;

2) Expansion or diversification of activities;

3) Premature repayment of long-term loans.

In the process of optimizing of cash flows over time there are two basic methods - the alignment and synchronization. Alignment of cash flow is aimed at smoothing their volumes by separate intervals of the period of time. This optimization method allows to eliminate to a certain degree the seasonal and cyclical variations in the formation of cash flows (both positive and negative), to optimize parallel average cash balances and increasing liquidity. The results of this optimization method of cash flows over time are evaluated using standard deviation and variation coefficient that should be reduced in the optimization process.

Synchronization of cash flows is based on the covariance of positive and negative types. During synchronization there must be ensured improved correlation between these two types of cash flows. The results of this optimization method of cash flows over time are estimated using the correlation coefficient, which is in the optimization process, should aim to value of +1.

Tightness of correlation is improved by speeding up or slowing down of payments.

Payment transactions are accelerating by the following activities:

1) Increasing the size of discounts to debtors;

2) Reducing the term of trade credit extended to customers;

3) Tightening of monetary policy on the collection of debt;

4) Tightening procedures for assessing the creditworthiness of debtors with purpose in reducing the percentage of insolvent buyers of organization;

5) Use of modern financial instruments such as factoring, discounting bills, forfeiting;

6) Use of such types of short-term loans as overdraft and credit line.

The slowdown of payments may be carried out by:

1) Prolongation of trade credit granted by suppliers;

2) Acquisition of long-term assets through leasing, as well as transfer to outsourcing of strategically less significant parts of the organization;

3) Transfer of short-term loans into long-term;

4) Reducing the payments to suppliers in cash.

Cash as a form of current assets is characterized by certain attributes:

• Routine - funds are used to pay current liabilities, therefore, between the incoming and outgoing cash flow there is always a gap in time. As a result, the company has to constantly earn free money to a bank account;

• Precautions - activity of the company is not tightly regulated by nature, so cash is needed to cover unexpected of payments. For these purposes it is expedient to create a safety stock of cash;

• Speculative - cash is necessary for speculative reasons, as there is always a little likelihood that suddenly there will appear an opportunity for profitable investment.

However, cash itself is a nonprofit asset, so the primary objective of the policy of its management is keeping it at the lowest appropriate level, sufficient for effective financial and economic activities of the organization, including:

• Timely payment of suppliers' invoices, allowing to use offered discounts on the price of the goods;

• Maintain a constant creditworthiness;

• Pay unforeseen expenses arising in the course of commercial activity.

As noted above, if there is large money the current account organization suffers opportunity costs (refusal to participate to any investment project). With a minimum stock of cash there are costs for replenish the stock, so-called maintenance costs (selling and distribution expenses resulting from the purchase and sale of securities, or interest and other costs associated with the involvement of a loan to replenish the cash balance). Therefore, solving the problem of optimizing the balance of money to the account, it is useful to consider two mutually exclusive things: maintaining the current pay and receiving additional income from the investment of available cash.

3.2. Ways to optimize the management of accounts receivable

Accounts receivable is an important part of enterprise assets. It should be noted that its share in total assets of the analyzed company on 1 January 2010 was 63%. Therefore the construction of an effective management system accounts receivable and its stable functioning are among the most important areas of enterprise management.

Table 3.2.1. Dynamics of accounts receivable for 2005-2009

	2005	2006	2007	2008	2009
Receivables	17 045	52 180	56 393	82 065	72 560
Balance	55 861	90 886	119 668	127 477	107 173
Share of receivables in the balance sheet total	0.26	0.5	0.27	0.59	0.63

Receivables in the economy have two important features:

• A source of free money for the debtor;

• Increasing products and services market for the lender.

In real practice, it is impossible to reduce accounts receivable to zero but it is justified with respect to the expired part of it. In order to minimize the risk of expired accounts receivable, which may lead business to losses, it is needed to improve the system of management.

Figure 3.2.1. Schematic model of the accounts receivable control system of an enterprise

A generalized theoretical model underlying the establishment of management systems accounts receivable can be illustrated by Fig. 3.2.1. Controlled subsystem (object) is formed as a result of shipping products to customers and conduct payments, including advances to suppliers of material resources and components, as well as to partners for a variety of services rendered to it (the entrance to the control system). At the output there are formed accounts receivable including overdue. The process of regulatory impact is supported by three units: implementation of measurement functions, management and implementation of executive functions. Measuring unit based on the creation of a database on debtors determines the composition, size, structure, and statute of limitations of accounts receivable that is used by the control unit to develop a corrective management actions. For this control subsystem produces a target and functional structure of action based on the formulation of goals, objectives and principles of management, updating the composition and structure of the database on debtors, the expansion of theoretical knowledge and cumulated experience for management of accounts receivable, as well as taking into account the probabilistic nature of behavior debtors. As a result, developed set of means of impact is realized by the executive block which carries out correction of potential payments to debtors (input control). This completes a conventional management cycle of accounts receivable.

In projected control system emphasis is on reducing external receivables arising through the fault of suppliers of material resources and components, whom advance payments were carried out to, and they did not provide timely delivery in accordance with the terms of the contract.

Effectiveness of management of accounts receivable is expressed in ensuring timely repayment of money and conducting sustained and concerted work of involved in its structural divisions of enterprise. To clarify the management objectives of accounts receivable it is important to more clearly identify the detailed structure the subjects involved in its appearance and elimination of expired parts (Fig. 3.2.2).

Figure 3.2.2. Participants in the process of appearance and management of accounts receivable

The interaction organization between actors involved in the occurrence and regulation of accounts receivable, suggests respect for the fundamental principles that promote effective work of management system of accounts receivable (Fig. 3.2.3).

Figure 3.2.3. Principles of management of accounts receivable

The final stage of designing the management system is the development of accounts receivable its organizational and functional structure (Fig. 3.2.4). This scheme regulates the functional interaction between the structural subdivisions of enterprises directly involved in the occurrence and continuous control of accounts receivable, including overdue. In this case, such a control scheme does not require the introduction of additional staffing and involves the use of its own staff. Formed out of It committee on management of accounts receivable is permanent, it is an advisory body with functional responsibilities for development of managerial decisions, which meets at regular intervals. Developed by the Commission decisions are made and controlled by the Deputy Director General for Economy and Finance.

Figure 3.2.4. The organizational structure of accounts receivable management in the enterprise

3.3. Implementing the components associated with payment of goods sold to the motivating system of managers.

It is proposed to implement the following policy of receivables management:

Bonuses are aimed at strengthening the material interest and increase employees' responsibility to improve the performance of the company. The main criterion for assessing employee’s performance is the fulfillment of individual sales plan is established by parish funds.

• Employees are eligible for current bonuses under the following conditions:

• Fulfillment of the annual individual sales plan by more than 100%;

• Reducing the value of accounts receivable;

• Reducing the value of accounts payable for the supply of products, goods, works and services;

• The observance of labor discipline;

• Compliance with the requirements of the job, labor law, requirements for the protection and safety.

• Lump-sum bonus payment can be made:

• For qualitative and timely execution of critical tasks, and especially urgent work, occasional task of leadership;

• On the basis of a successful employee performance.

• The size of the current premiums is determined by the coefficient for the calculation of premiums:

• 0.0033 - for calculating premiums in the performance of individual sales plan within the more than 100% to 150%;

• 0.0066 - for calculating premiums in the performance of individual sales plan from 150% to 200%;

• 0.01 - for calculating premiums in the performance of individual sales plan of more than 200%.

Current premiums are charged to employees in accordance with the personal result of work of each employee as follows:

(AFP-P)*k – CP, (3.3.1)

where:

AFP – actual sales plan fulfillment

P – individual sales plan

k – coefficient for premium calculation

CP – current premium accrued since the beginning of the year

Proposed policy can help the company to decrease its accounts receivable.

3.4. Conducting an interview with a competent specialist

In order to get a competent opinion an interview with finance director of SPETSSTROY-SVYAZ Ltd., Victoria Ivanilova, was conducted. She has been working in the company for more than 7 years starting from an accountant position.

1. How do you assess the financial condition of the company?

After the crisis of 2008, in my opinion, the economy is still at a low level. Orders of government and departmental enterprises and organizations, our main customers, have decreased. Furthermore creditworthiness of all customers has dropped significantly. In 2011, we have not yet reached the level of 2008 and even 2007 in sales. During the 2010 financial state of the enterprise deteriorated even compared with 2009.

2. Have the similar measures to reduce the accounts receivable been conducted before?

The company has attempted to reduce receivables, but in other ways, by offering leasing schemes, by working with our customers by security of the enterprise. Unfortunately, these measures have not brought significant results. Among the financiers of customers, unfortunately, there are few professionals who can appreciate the leasing operations. Employees of departments and state enterprises are "tied" to corporate foundations. In such organizations, even insignificant change in the form of contract is very problematic. However, they realize that sue to recover the debt is not in the interests of the supplier, because there is a high probability that this company will lose other orders from these contractors.

3. What are the problems regarding current assets faced by the industry?

Firstly, businesses that develop equipment of wire communication lose customers, not only because of the active market entry of services of mobile operators, but also because of the active "recommendations "of the Russian government for the similar equipment of European manufacturers, which is not always justified by the quality of their products.

Secondly, Russia produces very few components that meet modern requirements (e.g., chips at various levels).

Thirdly, regulatory framework that determines the equipment requirements for wire communication, as well as the quality management system is often interpreted by each department in its own way, and as a consequence, we are forced to incur substantial expenses. Thus there is no guarantee that these costs will be paid back.

4. What are your predictions for the financial condition of the enterprise for the next year or two?

The company today maintains an active policy to diversify the portfolio of sales, to reduce accounts receivable and enters the regime of austerity. So I hope that by 2013 the company will come out of crisis.