Evaluate operating policies that affect cash conversion, supplier relationships, and working capital risk.
Credit, inventory, receivable, payable, and supplier-payment policies are treasury tools because they determine how quickly operations convert into cash. These policies also affect sales, customer quality, service reliability, supplier relationships, and inventory availability. A policy that improves cash timing can still be a poor recommendation if it shifts too much risk to operations.
The Finance response should balance cash flow with operating strategy. Do not recommend tighter credit, lower inventory, or slower supplier payment without explaining the trade-off.
Policy questions usually ask whether management should change terms, inventory levels, collection practices, or supplier payment behaviour.
| Policy area | Cash effect | Operating risk |
|---|---|---|
| Customer credit approval | Reduces bad debt and overdue accounts. | May slow sales or reject good customers. |
| Customer payment terms | Accelerates collections. | May weaken customer relationships or competitive position. |
| Collection procedures | Improves cash conversion and reduces overdue balances. | May require staffing, systems, and customer escalation. |
| Inventory level | Releases or absorbs cash. | Too little inventory creates stockouts; too much creates carrying cost and obsolescence. |
| Supplier terms | Preserves cash or captures discounts. | Poor terms may increase price, reduce priority, or strain supply. |
| Payment timing | Uses supplier credit as financing. | Stretching payables can damage reputation and reliability. |
Policy effects should be tied to working capital days:
[ \text{Days sales outstanding} = \frac{\text{Average receivables}}{\text{Credit sales}} \times 365 ]
[ \text{Days inventory outstanding} = \frac{\text{Average inventory}}{\text{Cost of sales}} \times 365 ]
[ \text{Days payable outstanding} = \frac{\text{Average payables}}{\text{Purchases or cost of sales}} \times 365 ]
Use the result to discuss policy, not just arithmetic. A high days sales outstanding may reflect weak collection, deliberate customer support, dispute delays, or poor credit screening.
A credit policy should state who qualifies for credit, how much credit is allowed, what terms apply, and what happens when payment is late.
| Policy element | What to define |
|---|---|
| Approval criteria | Credit history, financial strength, payment record, customer importance, and risk tier. |
| Credit limit | Maximum exposure by customer or group. |
| Standard terms | Payment deadline, deposit, discount, interest, and documentation. |
| Monitoring | Aging report, dispute tracking, overdue thresholds, and responsible owner. |
| Collection process | Reminder, escalation, hold on future orders, payment plan, or legal action. |
| Exceptions | Who approves deviations and how they are documented. |
A stricter credit policy improves cash only if it is enforceable and does not undermine the sales strategy.
Inventory policy should balance availability with cash cost.
| Inventory issue | Finance implication |
|---|---|
| High safety stock | Protects service but ties up cash. |
| Low safety stock | Releases cash but increases stockout risk. |
| Long lead time | Requires earlier ordering and higher reserve levels. |
| Uncertain demand | Raises risk of obsolescence or shortage. |
| Bulk purchase discounts | May reduce unit cost but increase carrying cost and cash use. |
| Slow-moving inventory | May require markdown, write-down, liquidation, or purchasing changes. |
| Critical parts | May justify higher inventory despite low turnover. |
Do not evaluate inventory only by days on hand. Consider demand, margin, customer service, supplier reliability, and obsolescence.
Supplier terms are a financing source, but they are not free if they create lost discounts, higher prices, lower priority, or relationship damage.
| Supplier choice | Better fit | Caution |
|---|---|---|
| Take early payment discount | Entity has cash and discount return is attractive. | Cash may be needed for higher-priority obligations. |
| Pay on normal terms | Stable relationship and predictable cash cycle. | May not optimize cash if discounts are attractive. |
| Negotiate longer terms | Temporary cash need or growth phase. | Supplier may raise prices or tighten supply. |
| Stretch payables beyond terms | Emergency liquidity pressure. | Can damage credit reputation and supply reliability. |
| Consolidate suppliers | Better terms or purchasing power. | Concentration and dependency risk may increase. |
The answer should distinguish negotiating terms from simply paying late.
Some policy changes improve the cash forecast by moving risk elsewhere.
| Policy change | Cash benefit | Risk shifted to |
|---|---|---|
| Tighten credit sharply | Faster collections and lower bad debts. | Sales team and customers. |
| Reduce inventory minimums | Lower working capital. | Operations and customer service. |
| Stretch supplier payments | Short-term cash preservation. | Suppliers and reputation. |
| Require deposits | Better upfront cash. | Customers and sales conversion. |
| Use aggressive collections | Faster receivable recovery. | Customer relationship and brand. |
A sustainable policy improves cash without creating a larger operating problem.
Use this order for policy questions:
| Pitfall | Correction |
|---|---|
| Tightening credit without sales analysis. | Consider customer quality, margin, and competitive terms. |
| Reducing inventory without service analysis. | Consider demand, lead time, stockout cost, and critical items. |
| Treating delayed supplier payment as normal financing. | Distinguish negotiated terms from late payment. |
| Using days metrics without cause analysis. | Explain why the metric changed and what action follows. |
| Omitting policy ownership. | State who approves credit, inventory, and payment exceptions. |