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Cash Management GreenPower is an Irish-owned and headquartered electricity supply business with operations in Ireland, the UK, and France
Cash Management GreenPower is an Irish-owned and headquartered electricity supply business with operations in Ireland, the UK, and France. It provides electricity to domestic and commercial users in each of these countries. It receives 50% of its revenue in Ireland, 30% in the UK, and 20% in France. Total revenue is approximately €25 million equivalent.It does not generate electricity. It purchases electricity that is generated from renewable sources from the National Grid in each country and sells that electricity on to customers. It sources the electricity within the country in which it is ultimately sold to customers. There is a lag of 30 days between the time it purchases electricity from the National Grid and when it must pay for that electricity.It bills customers in Ireland and the UK on a monthly basis in arrears for the usage in that month. In France the billing period is every two months. These are standard billing periods within each market.The business is in a surplus cash position generally, i.e. over the course of a year it will have a positive bank balance. However, periodically there will be times when it goes into substantial overdraft when it must pay the National Grids in each country for the electricity it has purchased. The National Grids are very strict on the 30 day payment terms and not meeting these terms would be very damaging to the business’ relationship with its key supplier.The GreenPower Finance Director has recently been appointed and is trying to develop a more efficient cash management system. She believes the business is not managing its cash well and could make savings or make risk management easier if they had better ways of ensuring consistent cashflows.
How would you advise the Finance Director on banking structures or other things the business could do to make their cash management more efficient?
Expert Solution
In the given scenario, an organization like Green power should be able to match its cash inflows to its cash outflows. For making cash efficiency, it is required that Green power must make proper balance between account receivables and account payables.
So some suggestions to finance director can be explained as follows :
1. Green power raises invoices for its sales to three countries. In these cases, the credit period for receiving the cash can range between 15 to 30 days. In given condition company is giving credit facility to France 2 months who is buying only 20% electricity that shows inefficient cash management system. For inspiring them cash discount can be provided also.
2. Cash management must ensure faster recovery with strict compliance of receivables to avoid a cash crunch. If the average time for recovery is shorter and strict, the company will have enough cash in hand to make its payments. Timely payments ensure lesser costs (interests, penalties) to the Green power with lowering bad debts.
3. Inefficient cash management function, payables management is also important. In given scenario Nation grid is providing 1 month period for payment with strict compliance. So same policy should be adapted by Green power against it's customers.
4. Short-term credit from banks and financial institutions should be maintained with strong creditworthiness to avoid cash crisis of Green power, however, these credit facilities come at a cost and therefore, Green power must ensure that they maintain a good liquidity position; this will help in timely repayments of debts to National Grid in emergency situations.
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