Welcome to this chapter on tracking regulations!
In this Operational Management course, we will see all the steps necessary to monitor regulations, cash flow and financing of the operating cycle.
Concretely, here are the points that I will cover in this course:
Cash
As part of the BTS MCO, in Operational Management, Cash flow refers to the amount of money that a business unit has immediately available to meet its daily operating needs.
When we talk about treasury, we distinguish between the following two categories: cash and bank.
La caisse
The cash register is no longer a simple metal box in which you store coins or banknotes. It has become a real connected computer.
The physical cash register
As soon as you go to a store, it is there. The physical cash register is a computer that records all the transactions of the day. It takes into account receipts but also disbursements. All types of payments are accepted: cash, checks, payment by credit card.
This physical cash register is often called a point of sale terminal (POS) when the commercial unit has decided to connect it to the computer network.
The cash book
Among the accounting documents found within the company is the cash book. It records all cash payments of the business unit.
What is cash tracking used for?
Cash tracking is very important and is used to:
- edit a daily summary of turnover including tax. This is the “cash register z” or “z ticket”The total sales including all taxes are thus calculated and distributed by payment type and by VAT rate.
- check the cash balance with the balance found in the physical cash register.
- establish rules for check deposits and cash deposits in banks.
The bank
Similarly, bank monitoring is very important in the business unit. It allows to carry out different controls on the following operations:
- collection operations carried out via transfers, bank cards or commercial paper.
- disbursement operations such as direct debits, check payments, bank card payments.
- The difference between receipts and disbursements, i.e. the determination of the bank account balance.
Financing the operating cycle
If you want a refresher on the meaning of the operating cycle, I invite you to read my article entitled Operating cycle: 7 questions to understand everything.
Financing the operating cycle can be achieved in different ways by the business unit.
To do this, the company can act on the different components of the operating cycle such as customers or the bank.
Negotiating with customers
Ideally, customers should pay their invoices as soon as possible, or even on the day of the transaction, i.e. in cash.
But in reality, companies often pay late. The business unit must therefore review its customers' payment terms by negotiating shorter terms with them.
In order to persuade its customers, the company can offer them financial discounts on the invoice by including a settlement discountThis discount consists of encouraging customers to pay earlier in exchange for a percentage reduction on the purchase invoice.
Here is an example of a settlement discount.
On 24/08/N, the company Miladra invoices a customer for an amount of €15 excluding VAT to be paid on 000/15/N. The customer agrees to make payment immediately on condition that Miladra grants him a 09% reduction.
The business unit accepts but bears a financial cost of the following amount: 15 x 000 or €0,03.
This is the amount of the settlement discount granted to its customer.
Negotiate with the bank
The company can also turn to its bank if it wishes to finance its operating cycle.
The line of credit
The line of credit or authorized overdraft is a short-term advance granted by the bank.
The company can therefore spend more money than it actually has.
The advantage of this type of financing is that the company is only billed when it is used.
I will take an example to illustrate the authorized overdraft.
Miladra Company has a credit line of €50. It has no cash from 000/01/N to 08/15/N, and its bank account shows a debit balance of €09.
The banking conditions are as follows:
- annual interest rate: 7%
- fixed commission: €40
I will calculate the amount of bank charges, that is to say all the amounts taken by the bank.
Interest: 35 x 000 x (0,07 days (from 45/01 to 08/15) / 09 days) = €360
Agios: 306,25 + 40 = €346,25
Interpretation: Being overdrawn costs the Miladra company €346,25.
Discounting a commercial paper
A commercial instrument is a commercial document signed between professionals that allows an invoice to be settled. The document indicates various elements:
- customer contact details
- supplier contact details
- the due date
- the amount of the invoice(s)
To discount a commercial instrument or a bill of exchange is to anticipate the due date.
I will take an example so you can understand better.
Miladra Company made a sale on 01/07/N. It was agreed with the customer to pay by bill of exchange. The invoice amount is €45 and the due date is 000/31/N.
The banking conditions are as follows:
- discount rate: 7% per year
- fixed commission: €29
Miladra goes to her bank on 15/07/N.
Number of days in advance: 45 days from 15/07 to 31/08
Discount (=interest): 45 x 000 x (0,07 days / 45 days) or €360.
Agios: 393,75 + 29 = €422,75
interpretation:
Miladra will not receive the initial sum of €45 owed by her client.
If she decides to discount the commercial paper, her bank will pay her the difference between the amount invoiced to her customer and the amount of bank charges levied by the bank.
In our example, Miladra will obtain the sum of: 45 – 000, i.e. an amount of €422,75
Payment deadlines
Monitoring regulations
The company has the ability to track its customers' payments using various tools.
The aged scale
An aged balance sheet is an accounting document widely used by companies to track future cash flow. It summarizes all receivables to be collected or debts to be paid.
It specifies the following elements:
- the customer or supplier account number
- the name of the customer or supplier
- the account balance
- the amount of the unmatured claim or debt according to the due date
- the amount of the claim or debt due according to the due date
Here is an example of a customer aged balance:
Here is an example of an aged supplier balance:
How to read and interpret an aged customer balance sheet?
The total amount of receivables:
Total overdue receivables:
Unpaid receivables:
Amounts due for 30 days:
Amount to be collected in 30 days:
The invoice schedule
An invoice schedule allows you to summarize for each invoice its amount, the amount already paid, the balance to be paid as well as the due date.
The business unit will be able to detect overdue invoices.
Here is an example of an invoice schedule:
Invoice 1587 is about 15 days late. The company must follow up by phone or email.
Invoice 2587 is fully paid. There is no need to take any action on this invoice.
On the other hand, the entire invoice 1258 is still to be paid on 07/09/N while the due date is 11/08/N. It is necessary to send a reminder by registered letter with acknowledgment of receipt.
How to calculate the actual effective payment period?
The actual effective payment period is the actual number of days between the date of the day after the sale and the due date.
Calculation in calendar days:
Example: Invoice issued on 8/07/N, 35 day period.
Deadline will be 08/07 + 35 days or the 23 / 08 - Effective deadline: 35 days.
End of month due:
Example: Invoice issued on 8/07/N, deadline of 35 days end of month.
Deadline will be: 08/07 + 35 days shifted to the end of the month therefore 31/08/N.
The effective period is therefore 43 days. (35 + 8 days to reach the end of August).
End of billing month:
Example: Invoice issued on 8/07/N, deadline of 35 days end of month.
Deadline will be: 31/07 (08/07 shifted to the end of the month) + 35 days or 05/09/N
The effective period is therefore 57 days. (from 08/07 to 05/09).
Whatever calculation method is chosen by the company, it must be specified in the general terms and conditions of sale (GTC).
Consequences of payment delays on operations
Customer payment terms and supplier payment terms have an impact on the operating cycle but also on the working capital requirement.
In the chapter on the operating cycle, this is very well explained.
Consequence of a variation on the operating cycle
The supplier's payment term has no impact on the operating cycle. However, a variation in the customer's payment term has consequences on the total duration of the operating cycle.
A 15-day increase in customer lead time also increases the operating cycle by the same amount of time. Of course, the reverse is also true.
Consequence of a variation in the working capital requirement (WCR)
A change in the payment period (customers or suppliers) has an impact on the working capital requirement. The following table shows you the different possibilities following a change in the payment period.
| Type of Variation | Customer payment deadline | Supplier payment deadline |
|---|---|---|
| Increase | the WCR increases because the “customer receivables” item increases. | the WCR decreases because the “Supplier Debts” item increases. |
| Decrease | the WCR decreases because the “customer receivables” item decreases. | the WCR increases because the “Supplier Debts” item decreases. |
Consequence of a variation on cash flow
The following table shows you the different possibilities following a change in payment deadline.
| Type of Variation | Customer payment deadline | Supplier payment deadline |
|---|---|---|
| Increase | Cash flow decreases because the "accounts receivable" item increases. | Cash flow increases because the “Trade payables” item increases. |
| Decrease | Cash flow increases because the "accounts receivable" item decreases. | Cash flow decreases because the “Trade payables” item decreases. |
Conclusion
As you will have understood, to reduce the need for financing, negotiations with customers and/or suppliers are necessary. Monitoring payments, cash flow and financing the operating cycle necessarily involves reducing the WCR.
There you have it, now you know how to track regulations, cash flow and financing of the operating cycle. You no longer have any excuse not to achieve your goal: Getting an excellent grade on the Operational Management test!