High level overview of some managerial finance strategies to add value to your organisation. Covered as part of MBA subject Managerial Finance (2013).
Managerial Finance Strategies to Add Value
The following strategies to add to the net present value (NPR) of a company by altering the cash flow for the better.
Add Value by Maximising Existing Assets
With an existing asset you can:
Increase revenue by either higher sales numbers (make & sell more), or by raising your prices (charge more). The other side of the coin is the decreasing the expenses incurred when using the asset. Find ways to use less resources through greater operational efficiency and seek lower the prices of raw materials and asset support services through tighter procurement.
Add Value by Introducing New Assets
This is where an organisation makes an asset purchase that adds net present value (NPR) to the organisation. A new asset purchase can increase NPR by greater production capacity, or enabling higher quality to support higher price, or by allowing a new product line. New machinery can add value by being more efficient or reliable.
Add Value by Managing Assets more effectively
Another way to add value to spend more time on making sure asset management is optimum. Is the replacement cycle of your assets the most effective? Is delaying replacement to save money really adding value, or is it actually costing more in the long run? Deciding whether or not to replace an asset or maintain the existing one is an asset management question that requires net present value calculations.
Add Value by Manipulating Cash Flow Timing
You can add value by obtaining your money earlier and paying your bills later:
Add Value by Collecting Your Money Earlier
You can add value by obtaining your money earlier. Issue invoices as sooner, shorten the payment options and be firmer with chasing up your debtors. Can the bad debtors be managed in a way that returns a higher percentage of what is owed?
Add Value by Deferring Payments to Creditors
If you can defer payments to creditors without penalty, then doing so will add value to the organisation. The longer you hold the money the more time you have to earn interest on it.
To illustrate the point, if you collect your money at purchase, and have 90 day terms with the supplier you can earn three months interest on that money before having to pay for the goods you sold.
Large companies that do this could be considered like a bank, as they holding other peoples money. Apple and the Australian supermarket chain Coles are two examples of companies that are very successful at ‘being a bank’.
Add Value by Reducing Days the Product is in Inventory
Lets consider the example above in more detail – where you sell a product, receive payment for it immediately, yet have 90 days to pay the supplier. How long did the product stay on the shelf before being sold? Each day of inventory time will take a day from your possible 90 day period of earning interest. How much stock are you carrying, both on the shelf, and in the warehouse? Reducing your days stock will create value.
Add Value by Deferring Maintenance
When money is tight you can defer preventative maintenance in favour of better short term cash flow. This strategy comes with many risks to the ongoing returns of your assets, so should only be done with great care, or, out of desperation!
Add Value by Reducing the Cost of Capital
Most simply, if you can reduce the interest rate on any of your debt facilities it will have an immediate value-adding effect. Finding cheaper, more effective sources of capital is therefore a key component of managerial finance.
So that’s some Managerial Finance Strategies to Add Value. It’s not rocket science, but like many management theories and models, standing back and viewing your company with a simple model can be surprisingly effective.
Thoughts? Comments? Hit me up below!