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Gary Brooks: Managing Cash During Troubled Times

Financial downturns happen regularly to nearly every business enterprise, putting pressure on cash management. Lower sales and collections, slower payments to vendors, and reluctant investors and lenders all must be managed by the CFO. There are some fundamental things that businesses can do to handle these situations. The earlier they are addressed – hopefully before the downturn hits – the more effective financial leaders can be.

This will be the first in a three part series of posts about managing cash (part two here; part three here). Today's post will focus on how basic internal business processes can mitigate the impacts to cash when a downturn occurs.

Basic Blocking and Tackling

Begin by setting up orderly opening, sorting, and routing of mail so that cash received is deposited timely, invoices are processed quickly, and sales orders are addressed immediately. Having dedicated email addresses for customers and vendors to use allows you to setup similar procedures and controls for electronic documents. Having a controlled process that tracks all items makes it easier to assure that revenue and purchasing related activities can be managed to your company's advantage.

Revenue, Billings, and Collections

  • Perform a detail review of sales contracts. Are they clear as to deliverables and when payments are due by customers? We firmly believe that about 90% of slow payments from customers can be avoided by carefully worded and enforced sales contracts. This includes careful review of customer purchase order terms and conditions to make sure you can actually deliver the product or services promised. When appropriate, contracts should allow you to file liens when payments are not made timely; and that this is clear to customers to incentivize them to pay normally.
  • Make sure that your business process workflows accurately document the work performed or products delivered. This can involve customer receipts of goods or sign off of services rendered used as documentation for every billing.
  • Billing processes must be performed accurately, timely, and in accordance with the sales contracts. Avoid delaying billings. Always bill your customers as timely as possible and include appropriate documentation. Often this requires absolute cooperation from operations staff. They must be made aware of the importance of timely billing and ability to collect.
  • Customers should be contacted early in the billing process, at the latest by the due date, to make certain there are no collection issues, lost invoices, misunderstandings, etc. We typically have an accounts receivable employee call customers a few days after the billing goes out and then on the day after the collection is due – just as an early warning signal of any problems encountered. If there are issues with the customer, A/R employees can always escalate the issue up the reporting chain customary in your business.
  • And, while it seems obvious, it can sometimes be hard to have sales and operations follow-through on: Do not do business with customers that do not pay you!

Payables, Purchase Orders, and Invoice Processing

  • Make certain that procedures and processes related to purchase orders, receiving documents, and billings from vendors are efficient, accurate and timely. A key question to always focus on is, "How do we know what is missing?" 
  • Set up a schedule for all these processes. For example, let your people know that invoices received by a Tuesday will be set up in the system for payment by that Friday and that all vendor checks will be sent on the following Wednesday. Similar processes should be adopted for matching POs with receiving reports and matching deliveries with invoices as received. The goal is to always be able to determine easily what has been received and what is missing.
  • Generally, payroll processes will already be set up to gather time, process overtime, and special pay terms on a regular orderly schedule. Workflows should be established that allows at least one day a week when most of the relevant information is known for cash forecasting purposes.
As mentioned, most of these are things CFOs should put in place just to operate efficiently. These are beneficial during the best of times. During downturns, having efficient operations will allow more focus on managing cash. The next post in this series will focus on banking and cash management. 

Posted by Gary Brooks
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