Chapter 2 Understanding working capital management
The physical order to cash cycle- Receive sales request.
In most industries, sales requests will be
sent out to companies on a customer’s
existing approved supplier list; approved
supplier lists are not always used,
however. A sales request may be a
discrete document for a specific order,
or it may be part of a regular ongoing
contract. For retail companies a sales
request may be an individual enquiry. - Respond to sales request.
However the sales request is received,
the company needs to respond to the
request by quoting a price. Again, the
way in which the company responds
will vary according to the nature of the
industry. Part of the response process
will have been predetermined. For
example, a company may decide to
establish an internet transaction tool- either retail-facing or as part of an
industry collaboration. By producing the
appropriate functionality, the company’s
- either retail-facing or as part of an
initial response to a sale request may
be an automated response, perhaps
allowing the sale to be completed. At
the very least, the response to the sales
request can be a confirmation that goods
are in stock, or may allow the items to be
placed on order.- Negotiate credit terms.
Just as in the purchase to pay cycle,
the company receiving a sales request
will want to negotiate appropriate credit
terms. In this case, the seller will want to
try to ensure as short a payment term as
possible, to allow the sale to be converted
into cash as quickly as possible. At
the same time, the seller will want to
minimise its exposure to counterparty
risk (in this case, that when goods are
shipped the customer cannot, or refuses
to, pay). For international transactions
this may include negotiating the use of a
letter of credit. For other sales (e.g. online
sales to retail consumers), payment in
advance may be appropriate. - Accept contract to supply.
Once appropriate credit terms have been
agreed, the company will accept the
contract to supply. Where the company is
already an approved supplier, the terms
of the contract to supply may already
have been agreed as part of the approval
process. In this case steps 1 to 4 may be
automated (perhaps as part of an online
order management process). - Deliver goods.
The supplier must ensure goods are
delivered in accordance with the contract,
otherwise issues will arise with regard
to payment. This is particularly the
case when a letter of credit is used.
Where there is an unforeseen delay,
communication with the customer is vital
both for this sale and for the future sales
relationship. It is important to remember
that during times of economic uncertainty
the counterparty will be examining every
problem for any sign of weakening credit
status. (The customer will not want to
be tied into a relationship with a supplier
whom it expects to fail. This is not just
because of the risk of financial loss
1 Receive sales request2 Respond to sales request3 Negotiate credit terms4 Accept contract to supply5 Deliver goods6 Raise invoice7 Collect payment8 Perform back office duties