Proactive funds management is to working capital what blocking and tackling is to football, so CEOs who consistently execute the fundamentals and a well-designed game plan won’t be forced to rely on a Hail Mary pass to improve cash flow. Ideally, CEOs need only tweak their strategy to fund working capital, speed up cash collections or discover new accounting efficiencies in response to changing economic conditions. But oftentimes, CEOs focus strictly on the cost of working capital solutions without considering their long-term impact or they fail to proactively manage funds; so when the economy swings, they’re behind the curve.
“Every business and every industry is different in terms of acceptable debt ratios, investment ratios and days sales outstanding (DSO), but regardless of the industry specifics or the economic conditions, if you’re managing your working capital position appropriately, everything else just falls into place,” says Sandy Ritchie, CTP, Vice President and Treasury Management Sales Manager for Fifth Third Bank, Tampa Bay.
Smart Business spoke with Ritchie about how CEOs can manage their company’s working capital position effectively.
What are the best tactics for improving cash flow through receivables and payables management?
Every business should have a stated process for collecting money in a fast and efficient manner. Track and monitor the average number of days it takes your customers to pay and proactively work with late customers so you’re not caught by surprise by a growing increase in your accounts receivables balance or a cash shortage. Accepting credit cards, debit cards and collecting payments through a lockbox are all ways to decrease DSO and improve cash flow. While these solutions require a small fee, the upside includes reduced staff time devoted to collections activities, drafting reports or creating bank deposits.
Once your company is receiving payments more quickly, the next step is to lengthen the time you have the funds. Pay your vendors with a purchasing card to improve float and review all partner agreements so they are paid at the maximum allowable limit. Renegotiate to more favorable payment terms with vendors.
How can reporting help?
No matter how you choose to collect the money, regularly review reports that detail each type of transaction as well as a consolidated report detailing your company’s total cash position; also make certain your reports tie together seamlessly and that the data flows into the general ledger. A regular review of real-time cash transactions will reveal opportunities to speed up collections, and report efficacy will enhance your company’s fraud protection program because it’s the gaps in reporting and the lack of real-time data that can leave the door open for fraud. A plus to putting all your transactions through one bank is that CEOs can benefit from comprehensive online reporting tools that update every day, without adding systems or staff.
What are the best practices for proactive funds reviews?
CEOs should schedule reviews with their bankers at least annually but as often as monthly if cash is tight. Take the opportunity to shop the banking competition at least once a year so you know what tools are available; hiring a new CFO or controller can be an opportune time to conduct a market survey. Banks are continually bringing new automated enhancements forward, such as online treasury management and online securities purchase and, best of all, it’s not necessary to be a big business to qualify for the services. Many of the packages are bundled, making them affordable for any size company. Then, when the working capital fundamentals are in place, CEOs can make small adjustments in reaction to market changes. For example, if your company experiences a 10 percent drop in deposits, a simple phone call can turn off the overnight investment sweep or turn on your company’s line of credit sweep. Because you know your company’s cash position through real-time data capture and know your options, you can make adjustments before a cash crunch becomes critical.
What working capital expertise should CEOs expect from their banker?
Your banker should not only offer fund management solutions, he or she should demonstrate the impact of his or her recommendations on the company’s financial statements. CEOs should furnish their financial statements and a chronology of their current accounting systems, including the requisite soft costs, such as staff time and labor needed for each type of transaction. The banker should be able to demonstrate the cash flow improvement and any reductions in overhead and other costs resulting from the solution. If the banker can’t quantify the savings from increased efficiency, try another banker. CEOs need to be open to new ways of doing things and they also need to consider the opportunities that result from implementing a comprehensive solution.
SANDY RITCHIE, CTP, is Vice President and Treasury Management Sales Manager for Fifth Third Bank, Tampa Bay. Reach her at (813) 306-2463 or firstname.lastname@example.org.