RSS feedsOne of the inevitable consequences of a long economic boom is the way a certain sloppiness creeps into the most well-run debtor control systems. When cheap cash is there for the taking, why bother to waste time and effort trying to chisel days or even weeks off the debtors ledger?
Unfortunately the good times are now no more than a vanishing speck in the rear-view mirror. We are now in the harsh, cold world of the credit crunch where cash, once again, is king. The difference this downturn around is the deep freeze that has settled, like a black cloud, over bank lending.
The inevitable tactical response to the flow of cash dwindling and drying up is for companies to start ‘managing’ the way they pay their suppliers particularly those suppliers who can’t kick back. Payment cycles start to move out to 60 and even 90 days. This, for example, puts a tremendous squeeze on second- and third-tier family- and owner-managed companies, which have moved from a cash-rich to a cash-starved world in the space of six months.
Alan Flower, a director at KPMG’s corporate restructuring division, says one of his group’s “in-demand” offerings is currently helping both plcs and owner-managed businesses implement sound cash management techniques. “There is no doubt that it is bad news out there right now. We’re seeing a lot of cash flow pressure and insolvencies are going up, while others are having to sharpen up their focus considerably on how they manage their cash,” he says.
Manage your cash
For Flower, the most likely survivors of the current environment are going to be
companies with excellent cash management cultures. “In companies that have world
class cash management, the credit control people will pick up on problems in the
client and supplier base before your sales team get to hear of them,” he says.
Acting on this and establishing a dialogue with troubled customers can save a
company significant sums.
At the same time, he says, companies have to get really slick at doing the basics. “You have to make sure your processes are efficient all the way through, so that you get your invoices out at the right point in time and your documentation is 100% accurate and in place. You need to understand when clients do their payment runs and you need to build a relationship with them and stay on top of them,” he says.
Suppliers need to keep in mind the obvious fact that when cash gets tight, it is the non-critical suppliers and those who are not on top of their invoicing and shouting for their cash that end up getting put to the back of the queue. Every company loves a silent creditor at a time like this and they show their love by keeping their money in their pocket or parcelling it out among the other, more vociferous creditors who are threatening to kick the door down.
Peter Flynn, commercial director at Close Invoice Financing, says there is no doubt that some of the bigger plcs, those with big treasury functions, are now hanging on to their cash at the expense of their creditors. “This really hits the small- to medium-sized companies, while at the same time the cost of borrowing for them has gone up significantly,” he says.
