Dollinger index

Foundations of New Venture Finance 259

them briefly.^7 As the examples presented indicate, however, this is a subject that requires

close attention and tenacious control by top management.

• Accounts payable:The longer the average accounts payable for the firm, the short-
  er the cash flow cycle. Therefore, entrepreneurs should develop relationships with
  vendors that enable them to extend payments when needed. Accounts payable are
  part of the permanent working capital of the venture and should be managed, not
  reduced.


• Raw materials inventory:This is part of the permanent working capital of the firm,
  but the entrepreneur must keep it as low as possible. Just-in-time delivery systems,
  a good management information system, and accurate sales forecasting can help
  keep raw materials inventory down.


• Work-in-process inventory: The Japanese kanban system of tagging and monitoring
  all work in process will help, as will the introduction of efficient operations, work-
  er training and incentives, and capital investment.


• Finished goods inventory: The managers should seek to develop relationships with
  buyers that will enable them to deliver as soon as the product is made. If buyers can
  warehouse the goods, they can take delivery and thereby finance the seller’s finished
  goods inventory. Accurate sales forecasts and management information systems are
  vital.

1 2 3 4 5

½½½½¾¾¾ ¾

½ ¾

a. Hypothetical cash cycle before control

30 days

Uncontrolled cash cycle = 45 + 40 + 15 + 50 – 30 = 120 days

45 days 40 days 15 days 50 days

b. Hypothetical cash cycle after control

½ ½ ½ ½

½ ¾

¾ ¾ ¾¾

1 2 3 4 5

40 days

20 days 25 days 15 days 25 days

Controlled cash cycle = 20 + 25 + 15 + 25 – 40 = 45 days

FIGURE 7.2 Controlling the Cash Flow Cycle