Unconventional Cash Flow Optimization Strategies: Real Company Examples
Corporates use various strategies to optimize cash flows, and here are some examples of how some companies have implemented these strategies:
1) Dynamic Discounting
Dynamic discounting is a strategy used by companies to incentivize their suppliers to pay their invoices early in exchange for a discount. This strategy can help companies optimize their cash flow by reducing the time it takes to receive payments from suppliers.
For example: Tata Steel uses dynamic discounting to offer its suppliers the option to receive a discount if they pay their invoices early. This strategy has helped Tata Steel to optimize its cash flow by reducing the time it takes to receive payments and reducing its working capital requirements.
2) Reverse Factoring
Reverse factoring is a financial technique that involves a company selling its accounts receivable to a third-party financier at a discount in exchange for immediate cash. This strategy can help companies optimize their cash flow by improving their cash conversion cycle and reducing the time it takes to receive payments.
For example: Mahindra & Mahindra has implemented a reverse factoring program to optimize its cash flow. The program allows the company to sell its accounts receivable to a third-party financier at a discount in exchange for immediate cash.
3) Sale and Leaseback
Sale and leaseback is a strategy where a company sells its assets, such as property or equipment, to a third party and then leases them back. This strategy can help companies optimize their cash flow by providing immediate cash and reducing their fixed costs.
For example: ICICI Bank used the sale and leaseback strategy to raise funds for its operations. The bank sold its office building in Mumbai to a third party and then leased it back. This helped the bank to optimize its cash flow and reduce its fixed costs.
4) Strategic Debt Restructuring
Strategic debt restructuring is a strategy used by companies to renegotiate their debt with their lenders. This strategy can help companies optimize their cash flow by reducing their debt burden and improving their financial position.
For example: The airline industry has used strategic debt restructuring to optimize their cash flow. Airlines such as Jet Airways and SpiceJet have renegotiated their debt with their lenders to reduce their interest payments and improve their financial position.
5) Improving Accounts Receivable - Coca-Cola
Coca-Cola implemented an automated system to improve its accounts receivable collections process. The system enabled the company to track outstanding invoices and send reminders to customers automatically. This helped the company to reduce its average collection period, improve cash flow, and reduce bad debt write-offs.
6) Managing Inventory - Walmart
Walmart has implemented a sophisticated inventory management system that helps the company optimize its cash flow. The system uses advanced analytics to forecast demand and determine the appropriate inventory levels. This has helped Walmart to minimize stockouts, reduce inventory levels, and improve its cash flow.
7) Negotiating Payment Terms - Apple
Apple has negotiated favorable payment terms with its suppliers to optimize its cash flow. The company has a reputation for paying its suppliers quickly, but it has also negotiated extended payment terms with some suppliers. For example, in 2016, Apple negotiated a deal with its LCD display supplier, where the supplier would receive payments over a three-year period, which allowed Apple to retain more cash on hand.
These are just a few out-of-the-box strategies that companies use to optimize their cash flows. Each company's situation is unique, and there are many other strategies that can be implemented depending on their specific needs and circumstances.