light headed!

Too often people at work are also falsely led into believing something untrue because they fail to see a deeper connection. We have been doing better at our finances in recent times with our bank account showing a surplus unheard of earlier. People thought this was mostly due to our customers paying us earlier than usual.

Actually this was untrue. We had been not following a streamlined process earlier. This means, quite often vendors would supply semi finished items quite before the actual required delivery.

The vendors stood to gain in the short run as they were billing earlier and faster than we could ship. We on the other hand were facing a situation where our payments were due far before our receivables. This means we had to pay an interest amount on the difference in time period. Over a quarter this could translate into huge amounts.

We have since then begun accepting deliveries only when the final assembly deliveries are due. This means we need to pay much later than before.

For e.g.
Consider C= Customer, V= Vendor and S1,S2,S3= Subcontractors.

Assumptions

1. All payments are due within 1 month.
2. We start with month zero.
3. Time to manufacture – 1 month.
4. C places an order on V. V divides the order into chunks and sublets it out to S1,S2 and S3.

Old Situation

• Month 0 – ‘C’ places order with ‘V’ and in turn sublets out to S1,S2,S3. Required delivery in month 5.
• Month 1 – S1,S2,S3 bring back materials.
• Month 2 – Payable’s due. ‘V’ makes the payment.
• Month 4 – ‘V’ Manufactures in month 4.
• Month 5 – ‘V’ Delivers product to ‘C’.
• Month 6 – Receivables due. ‘V’ receives payment.

New Situation

• Month 0 – ‘C’ places order with ‘V’ and in turn sublets out to S1,S2,S3. Required delivery in month 5.
• Month 1 – S1,S2,S3 bring back materials.
• Month 2 – Payable’s due in month 2. ‘V’ makes the payment.
• Month 4 – S1,S2,S3 bring back materials; ‘V’ manufactures in month 4.
• Month 5 – ‘V’ Delivers product to ‘C’. Payable’s due
• Month 6 – Receivables due. ‘V’ receives payment.

So we directly save three months of hard cash! This shows up in the bank account surplus.