FINANCE

Current economic pressures make cash flow enhancement a key to survival.

Recessions come and go as part of the natural and recurring business cycle. While we may not technically be in a recession, we are definitely experiencing uncertainty and challenging economic times. As a result, companies and organizations across the globe are implementing business strategies, including cutting discretionary spending, delaying investments and reducing overcapacity.

The current economic situation has, at its core, a massive de-leveraging within the financial markets. Thus, implementing proactive cash flow-enhancing strategies must be an essential focus of a successful business response. Just as businesses have re-engineered production processes to improve efficiency and shorten the production cycle, now it makes more sense than ever to perform a careful review of the parallel process of actual cash inflows and outflows, paying for materials, expenses and the ultimate receipt of cash from sales.

Don’t wait until you encounter a cash crunch. Take steps now to maximize cash flow using all possible resources. The following are a few suggestions.

Accounts Receivable Management

• Are invoices sent out in a timely manner when goods are shipped or services rendered?
• Are deposits billed early and in sufficient amounts to mitigate the company’s exposure on custom production or services?
• Are the terms updated to accelerate payments to improve the company’s leverage during collection negotiations?
• Has the company considered electronic invoicing and increased use of the Internet to reduce mail time?
• Do invoices include purchase order information and supporting documents, such as proof of delivery, to avoid customer processing delays?
• Are credit terms revisited regularly for slow-paying customers? Increase the cash-in-advance and cash-on-delivery terms to mitigate risk.
• Revisit and tighten all credit terms to avoid increased loss exposure.

Inventory

• Review trends in sales and adjust inventory levels accordingly.
• Sell obsolete inventory at discounted prices to generate cash.
• Negotiate with vendors to return unused stock and extend payment terms.
• Review supply chain for long lead items and work closely with vendors on quantity and pricing commitments.
• Order in smaller quantities and only when needed.
• Strive to have vendor payment terms provide free financing until cash from sale is received.
• Be alert for cash-strapped vendors offering early-payment discounts. If liquidity permits, this generally provides an excellent return on the payment with virtually no credit risk since you already have the goods.
• Monitor key vendor viability and seek secondary vendor relationships.
• Pay bills on time but close to the due date or accepted industry norm to maximize your cash position without jeopardizing your credit standing.

Cash Management and Financing

• Prepare and stress test short- and medium-term cash-flow forecasts with worst-case scenario “what ifs.” Plan to obtain financing and/or step up collection efforts to meet potential liquidity needs.
• Shop for borrowing capacity to meet future needs with as much lead time as possible.
• Be prepared to demonstrate the viability of your company or project before approaching a bank for financing.
• Monitor compliance with loan covenants and avoid violating them if at all possible. Banks are not as inclined to waive them without penalty as in the past.
• Approach your bank well in advance of loan-maturity dates to negotiate renewal and proactively address covenant violations.
• Monitor the status of any loans guaranteed for related parties, or cross collateral or cross default arrangements, to avoid possible unpleasant surprises.
• Benchmark key performance indicators and communicate to employees the importance of improving these metrics. Make sure responsibility and accountability are clearly communicated.
• Evaluate investment of unused funds to ensure preservation of principal and liquidity. Avoid complex instruments you may not fully understand.

Editor’s Note: Larry Calise, CPA, is a partner in the orlando office of cliftonlarsonallen.