Speeding up the cash flow cycle

Waterwand Pty Ltd was a successful manufacturer of gardening products. Although the company had healthy sales, it also had a growing cash flow problem.

Like many manufacturers, Waterwand suffered from a long cash flow cycle, including:

• 14 days to order and take delivery of raw materials.
• 32 days to manufacture and sell the product.
• 14 days to ship the product and issue the invoice.
• An average of 60 days in accounts receivable.

That meant the company’s working capital was locked away for 120 days at a time. As a result, Waterwand was increasingly reliant on its overdraft for day-to-day cash flow.

After talking to their Relationship Manager, Waterwand’s owners took steps to speed up every stage of the cash flow cycle. The changes included:

• Implementing a new, just-in-time supply chain management system.
• Buying new production equipment that shortened manufacturing times. By funding the purchase with Asset Finance, Waterwand was able to get access to the equipment it needed without draining the company of working capital.
• Invoicing faster, with shorter terms of trade.
• Using BPAY to put money in the company’s account faster.

By speeding up the cash flow cycle from 120 days to 90 days, Waterwand was able to free up working capital and generate a cash reserve.

The problem:  a four month cash flow cycle 

• This is a hypothetical example for illustrative purposes only and does not represent any particular individual or company.

 

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