A year after striking the financial services industry, the credit crunch is reaching the corporate world. When international companies such as Temasek of Singapore, Marks & Spencer, John Lewis Partnership and Taylor Wimpey send out signals that they are feeling the squeeze, it’s fair to say that every business should be mindful of its funding requirements in the current environment.
But it’s not just lack of liquidity in the money markets. With an economic downturn looming, companies are starting to look at cash flow with a newly critical eye, hoping to avoid the nightmare of falling revenues unmatched by lower cuts.
Visibility of cash
Cash monitoring and forecasting don’t sound like the most strategic or interesting parts of the CFO’s role – in fact, they’re delegated. But given the lack of liquidity and looming economic difficulties right now, any CFO will be expected to be aware of their cash position, at any point in time.
Whereas, in the past, net income forecasting was sufficient, today many investors require companies to produce a rolling 12-month cash flow outlook. That means having the right tools in place to be able to track data throughout the “financial supply chain” in your own organization and having consistent management information.
According to the late George Moore, founder member of the Society of Turnaround Professionals, cash forecast can be life or death for a business during a downturn. “A realistic and well-researched cash flow forecast 13 weeks out will pick up sudden increases in sales and costs,” he told Real Finance magazine in 2006. “It’s pretty straightforward to work in the payments side – the salaries, taxes, leases and supplier invoices. All you have to do then is estimate the collections you’re sure about and you’ll see straight away what you’ve got to do in terms of sales and improved collections.”
Outgoings are also vital: Activity-based costing, for example, can highlight overheads that could be eliminated and unprofitable lines that should be the first on the chopping block.
One aspect of working capital that’s often obscured from management is disputed invoices. Struggling clients will be managing their own working capital, and that can mean late payments or haggling; more complex disputes can put large sums into the dreaded “120+ days” column.
But if disputes are quickly raised to management then director level – rather than festering in the bottom drawer of an account executive – fast decisions can be made about potential refunds, starting negotiations with client decision-makers or taking legal action.
Companies are increasingly adopting integrated systems to automate cash-related processes. Large companies can take this a stage further with centralized shared services and outsourcing. Again, the credit crunch and economic downturn are very persuasive arguments for a general tune-up in finance function efficiency – and creating visibility in cash flow should be a prime driver.
Customer-to-cash
Cash management is more than just great systems and transparency in the finance function. From the moment a purchase order is taken to the payment of the final invoice, there are plenty of opportunities to influence the working capital cycle. Proactive cash management starts with the right credit decisions. As the sub-prime mortgage crisis illustrates, inappropriate underwriting rules can seriously damage business viability.
So the credit policy should be clearly defined – to include your company’s credit criteria, standard payment terms and detailed reporting requirements – and signed off by the board.
Ensuring invoices are accurate, timely and payment standards are clearly stated is key. Providing user-friendly payment facilities – such as online payments or direct debit options – will also help.
Offering a discount for prompt or early payment is a great way of improving cash flow. And, if you need to tighten the belt another notch, you always have the option of re-setting the credit terms offered to customers.
Your collection processes, routines and controls are critical to cash performance. Again, many companies have the best intentions – but metrics such as DSO (days sales outstanding), essential in monitoring working capital, can end up being overlooked.
With an uncertain economic outlook, it makes sense to conduct a daily review of the receivables report – it’s a great way to spot gradual tightening in specific sectors or problems emerging at key clients.
It’s also important to make stars out of the credit control team. They usually toil away in obscurity, but they are the engineers in the boiler-room of working capital. If they’re not already, turn them into “account managers” with a remit to help you understand your customers better and create relationships that could make the difference between getting paid on time or a few days late. Staff incentives can also have a significant impact – and not just in the risk or credit control teams. Sales people should understand that a sale is not complete until the payment has been received. So link remuneration to the appropriate collection metrics.
Finally, if your company’s standard terms and conditions include penalty interest on late payments, now could be the time to enforce them.
That sort of policy tightening requires a degree of diplomacy. But as part of a broader approach to contract enforcement that includes, say, early settlement discounts, it can be done.
The writer is Chief Executive of CIMA. For more information about CIMA, please visit
www.cimaglobal.com.
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