When a business encounters turbulent times, there are many ways that the CFO/Controller and CEO can face the challenges to enhance the financial position of a business and that significantly improve opportunities and reduce risks. These strategies will enhance the likelihood of the business surviving turbulent times and put it in a position to thrive again, when the environment improves.
Cash flow management
The management of cash flow is one of the cornerstones of most successful businesses and becomes much more critical when a business goes through turbulent times. We all agree that “cash is king” but many businesses leave the decisions about cash flow management to the clerical level staff and only occasionally instruct that minor changes be made. The CFO/Controller and CEO must have management of cash flow as one of their key areas of focus during challenging times. Even during prosperous periods, the elements of cash flow management reduce the risk of issues causing significant disruptions to the business.
Consider the possibility of your biggest debtor (often your biggest customer) being unable to meet established payment terms. In many businesses this would cause a cash flow crisis. This is not an unforeseeable event for many businesses in today’s economic climate.
So many actions can be taken to improve cash flow from areas that are working capital that it often only requires some focus and a determination to find the best way to reduce your risk. The first place to focus your attention is on collection of accounts receivable. See the article on “Speeding up the collection of receivables”.
Consider your ability to release cash tied up in your business by managing the following:
Payment of suppliers
Reduction of inventory
Speeding up the production cycle
We have all heard that a banker is someone who only wants to sell you an umbrella when the sun is shining, or some variation on that. Well, it is not too late for most businesses, as the sun is still peaking through the clouds. Certainly, if you expect to have a downturn in financial results in the next few months, then now is the best time to ask for an increase in the facility that you have with your bank and even consider seeking out other sources. Too many businesses wait until the need arises. When the need for a larger facility is caused by a downturn in operations, it is difficult to convince a banker that you are deserving of his umbrella – much better to ask for the facility before there are a few months of reduced profitability or even losses.
Key performance indicators
Take a few minutes to carefully assess the trends in your ratios and Key Performance Indicators (KPI) over the last two years. Consider how you can reverse any adverse trends and how you can improve those that are stable. It often helps to consider each of the factors in the calculation of the KPI, not just the result, as that is where the action step will need to be taken to yield the result. For example, when assessing the KPI of Days Sales Outstanding, examine the amounts outstanding from individual customers – say the twenty largest balances and any balance that is more than X days outstanding.
Update the KPI regularly and incorporate them into the ongoing reporting and management of the business. Include them in the budgeting process and report the KPI compared to budget.
Ensure that you investigate and take action on any KPI that changes from expectation. Challenge your management to improve on selected KPIs each month. For example, make March the month in which you challenge your management to improve Days Sales Outstanding by 10% (and then illustrate the success by showing the effect on cash flow). Ratios have the ability to reflect trends that are not easy to spot. If you track and graph your ratios on a periodic (monthly or at least quarterly) basis with comparatives to previous periods and budget, you should be able to easily explain why a ratio has changed and what you propose to do to manage the situation, for better or worse. For example, the Days Sales Outstanding and Days Inventory on hand are often effective warnings about cash flow problems and usually the first sign that more analysis and focus is required, so that management can develop a solution.
Disposal of non-core assets
Consider every asset in your business as a candidate for disposal – no exceptions! There are often assets hidden in categories where the component part can be sold. For example, slow moving inventory, surplus or old equipment, waste, scrap, by-products, accounts receivable, business units, lines of business, product lines, etc. If your challenge is caused by a downturn in business volumes, consider selling or sub-letting surplus space. One creative idea, in certain circumstances, is to “sell” your surplus capacity to a non-competing business that would need the same equipment. In other words, your business becomes a sub-contractor for them. A simple application is to use surplus space to provide storage for another business.
Take a page from retail businesses that sometimes have concessions in their premises, selling products that complement their lines of business. This can generate cash flow from the rental charge for the space, as well as draw additional traffic to your store. Is there a way to apply that to your business?
To help you learn more about this critical area, Mastermind will be running a workshop on March 24th where principles across Strategy, Marketing, Finance and People will be discussed in detail and attendees will be provided with a set of actionable steps that they can use back in their offices on the same day. It is hands-on and practical. You will make this come alive for YOUR company.
Attendees that will benefit most will be C-level executives and above in mid-size businesses that generate $5mil – $100mil in revenue. Such executives who are looking to Survive and Thrive through these Turbulent times should be attending. Click here for full details/registration. Register soon – space is limited.
James Phillipson is a Chartered Accountant and a Founding Principal of Mastermind Solutions Inc. with over twenty years experience in large and small businesses. He has provided financial counseling to his clients since 1996, often in the role of a Controller or Chief Financial Officer, for both public and private corporate clients. James has experience in financial roles in a wide variety of businesses and industries. This includes several large corporations and many medium-sized public and private companies.
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