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While managing working capital and cash flow have always been fundamental to a CPA's responsibilities, the current environment requires new ways of thinking and acting. Clearer cash flow strategies may need to be developed. More stringent processes for managing payables and receivables may need to be implemented. And more creativity may be required when working with customers, lenders, suppliers and vendors who are also seeking shelter from the storm.
The following best practices, related to the "four Cs" of working capital--cash flow, credit, communications, and capitalizing on opportunities--can help you and your clients put up the umbrella.
CASH IS KING
While cash flow is critical at any time, carefully managing credit, inventory, accounts receivable and payable is even more important when the economy is turbulent. As Sandy Miller, CPA, OSCPA member and director of accounting and external reporting for Jo-Ann Stores Inc., of Hudson, says: "Today, companies need to be cash cows."
Miller says that while Wall Street has traditionally admonished companies with too much cash, today's view is that companies that have issued too much public debt or have spent too deeply on acquisitions are negatively overextended. With the current lending crisis, cash-rich companies are becoming more attractive.
Becoming cash-rich requires a vigilant approach to managing cash flow. The old way of doing business is just that. As bankers, vendors, suppliers and customers are also trying to survive, your company's relationships, processes and even positioning may need to change.
"Companies need to get creative. They need to look at their product offerings and get rid of slow-moving or unprofitable products," says Miller. "Some companies may even need to reposition themselves to increase sales and enlarge their customer base."
Brian Marita, CPA, OSCPA member and partner at Ciuni & Panichi in Cleveland, agrees. "Banks are not financing a lot of inventory right now. Companies need to focus on realistic inventory levels and understand the extra costs of carrying too much inventory," he says.
Relationships and processes also may need to change as well when times are rough. Miller offers a few tips on internal controls: "Don't pay payables early, but pay on time. Understand that vendors will be scrutinizing who they sell too as well. You want to be in good standing with them, but hang on to your cash as long possible."
"Also look at your customers and their credit history more closely. You should be proactive and willing to work with customers, but you also need to be clear in your payment expectations," she says.
Patrick Henthorne, senior vice president and market manager for Chase Business Banking in Columbus, adds that it is important to monitor customer behavior. "Just like bankers do, you should look for changes in your customers' behavior. Are they spending less, putting purchases on hold, or not paying bills on their regular schedule? These could be warning signs of cash flow problems that will impact your business," he says.
Marita also advises clients to not lose sight of their own best practices, especially in turbulent times. He notes that billing and collections are two areas companies should be extra vigilant about when it comes to improving cash flow.
"Get back to the basics. Bill as soon as possible and make sure there are procedures for timely collections calls. Follow-up with customers as soon as a bill goes out so they know to expect it. Keep in contact with them so that your bill is top of mind. If you let two or three months go by, the bill can become uncollectable," he says.
Miller says it's also a good idea for companies to examine the procedures and processes in their "high-volume" departments: accounts receivable, accounts payable and inventory. The golden rule, she says, is to "touch things one time." Whether it's an invoice, a bill or an order, don't let anything sit, she says. Instead, have processes in place where the item flows immediately into the pipeline and smoothly through to fulfillment without anyone having to process it more than once.
Trimming the fat is crucial to improving cash flow as well, says Marita. "Companies have to make some hard choices these days. During the good years, layers of infrastructure can build up. Companies need to scrutinize these for costs and inefficiencies. Staffing and labor, maintenance, supplies, inventory all should be analyzed for their effect on cash flow. Nice-to-haves should be replaced by need-to-haves."
Henthorne advises companies to scrutinize all of their margins, including payroll, marketing, rent and supplies. He also recommends companies prepare 12-month best, realistic and worst-case cash flow scenarios.
"To be safe, assume a 10% to 20% decline in revenues and identify what changes you might have to make--and when--should you see a drop in your monthly revenue. Be sure to build in any recurring sales or seasonal trends," he says.
CREDIT WHERE--AND WHEN--IT'S DUE
From a company's perspective, credit is a necessary and normal cost of doing business. From a lender's perspective, credit needs to be earned. Miller says one of the best steps a company can take to become creditworthy is to really understand how much it costs to run their business and have a contingency plan.
"Scrutinize every aspect of your cost of doing business. For example, if you employ 50 people, can you survive with 45 people? Know exactly where your company is headed. Have a contingency plan to make your company more profitable in an economic downturn. In short, be prepared to react to adverse business conditions and let your lender know exactly how you will do that," Miller says.
Marita says companies need to put their best face forward when working with a lender. To do that, he recommends two vital actions for companies:
1. Have a written business plan
2. Be prepared to talk honestly about expenses, sales, strengths and shortcomings.
"Talk to your lender about your current customer base and your future sales potential. Be realistic about top-line revenue numbers now and in the future. Show your strengths but also be candid about your shortcomings. Give your lender a realistic 12-month, 3-year and 5-year business plan," he recommends.
Knowing that a company has a contingency plan for profitability in a down market will help lenders feel more confident in granting credit, says Marita, but you have to be up front and establish trust.
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"A contingency plan for expenses needs to be realistic. Show your banker how you will do what you say you are going to do to cut expenses. They need to see realistically obtainable results," he says. From a lender's perspective, Henthorne says it is vital to keep your financials current.
"Clean up your financials so that you'll be in a more favorable position to secure credit using accurate and up-to-date financial statements if faced with a crunch," he says. "This step will enhance your financial credibility when dealing with your bank."
He adds, "Meet with your banker even if you don't need to borrow money. Update them on your business and make them aware of any positive developments. If you're facing a tight financial situation, having your banker familiar with the successful aspects of your business could predispose them to assist you through difficult times."
COMMUNICATION IS KEY
Open and honest communications are crucial during uncertain economic times. This includes communication between companies and lenders, vendors, customers--and employees.
Miller advises that upper management must be engaged in every effort to increase working capital. The CFO and others involved in company finances should make an extra effort to keep management informed of every initiative. The CEO, CFO and COO must set the tone for communications, she says, and be committed to sharing information with employees. "When there's no communication, it's easy for rumors to begin. Senior management needs to share the information they can with employees and assure them they are all working toward the common good."
Henthorne and Marita agree that communications with all audiences--and even new audiences--is important.
"Now, more than ever, it is important to stay in front of your customers, prospects and bankers. Even if you aren't doing business with someone today, you want to be top of mind when things improve," Henthorne says.
Marita takes it a step further. "It's prudent to develop new relationships without harming current relationships. Talk to a new lender, try out a couple of new suppliers, spread out your supply chain, and seek new customers as you analyze risk versus sales with current customers. New relationships can offer great support in troubling times."
CAPITALIZE ON OPPORTUNITIES
Many companies are finding the silver lining in the economic storm clouds. Miller says that perhaps the biggest benefit of the times is that businesses are now forced to take a good hard look at the way they operate.
"Today, businesses are re-evaluating everything they do. They're looking at headcount and employment creep, inefficient processes and operations, unprofitable products, travel and entertainment and other costs of doing businesses. These are things most companies don't do often enough when things are going well," she says.
By re-evaluating processes in her own department, Miller found she could shorten her close time. "Shortening our close process enables us to provide information to senior management that much quicker. In turn, this helps management make important decisions and capitalize on opportunities sooner," she says.
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