Managing Cash Flow

156 Cost Reduction Analysis Procedures
• Cash management. Identifying areas for cash conservation, reduction and
elimination of unnecessary costs, development of pricing strategies that
maximize bottom line contributions, and implementation of operational
economies and efficiencies that result in effective use of resources
Activity Based Management (ABM) uses ABC system provided information
to improve the management and operation of ongoing activities. The goal of ABM
and ABC should be to increase the value of the products/services provided to customers
and to increase company profits by providing higher quality/added value
to customers at the lowest possible costs. ABM/ABC works toward improving
critical organizational decisions in such areas as:
• Product design and mix (what to sell and provide)
• Pricing considerations (what to charge)
• Customer mix (whom to sell)
• Sourcing (vendors, in house/outsource, markets)
• Improvement priorities (on what areas to concentrate)
• Cash management (where to allocate scarce resources)
In this endeavor to improve the organization, customer service, and compress
the cash conversion period through the implementation of best practices in
a program of continuous improvement, ABM/ABC looks at the following areas:
• Products/services. What to offer, continue or discontinue, expand or contract,
as well as cost-volume-profit (CVP) considerations, product/service
break-even analysis, and product line analysis
• Customers. To whom and how to sell (present and potential), customer
service considerations, profitability, customer statistics (sales, costs, and
profits), and sales forecasts
• Activities. Those that bring value to the product/service, such as material,
labor, and product related and those that offer support to the organization
at additional cost but provide no value to the product/service (non-valueadded),
such as administration, support functions, and top management
• Indicators of poor performance. Operational measures that provide an indication
that there is an area for improvement, such as scrap, vendor
returns, customer returns, rework, and rejects
ABM and ABC concepts provide the methodology for measuring the success
or failure of the company’s cash management endeavors as well as other performance
improvement programs such as Total Quality Management (TQM); Just
In Time (JIT) concepts for purchasing, manufacturing, and customer deliveries;
benchmarking; program of continuous improvements; and so on. These concepts
also provide for more effective management and operational decision making. In
conducting the cash management study, the company should consider the use of