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Nadia Jawad
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zkhaledCash flow problems cause more businesses to fail than anything else, which is a sobering thought when you consider the sorts of challenges that IT channel companies currently face. Here are 10 key tips for keeping on top of cash flow.
By Andrew Seymour, ITP Publishing Group
It’s said that cash flow problems cause more businesses to fail than anything else, which is a sobering thought when you consider the sorts of challenges that IT channel companies are facing to get their money in the current climate.
Guy Whitcroft, principal consultant at CapitalSteps and an expert on regional channel issues, ran a cash flow management workshop at the Digital Consumer Channel event in the UAE earlier this year. Here are his top 10 tips for keeping on top of cash flow.
10. Accurate forecasting holds the key
Quite simply, cash flow forecasting remains the single most important business intelligence tool for any channel company as it forms the platform on which all other decisions are made. Analyse the payment history of your customers and factor that into your forecasting. Look at which customers are regular payers, which ones are slow players and which ones will accelerate payments based on incentives. “Never be optimistic on a cash flow forecast because that way you are going to make promises about payments [that you owe to your suppliers],” advises Guy Whitcroft. “It could be embarrassing if you miss a payment to a supplier or ask for a discount to pay upfront and then find you don’t have the cash to do it because your cash forecast was so wrong. Make sure your cash flow forecast is accurate. That way you predict where the problems are and you can be proactive by trying to get cash in early.”
9. Know your sales cycles
Understanding how product sales cycles work can mean the difference between staying afloat and getting dragged under. Evaluate sales data on a weekly basis – not monthly – and pay attention to shipping cycles. If you are a distributor then establish the duration between placing an order and getting the stocks into your warehouse – and then build that into your forecast. “What a lot of people do is get lazy,” says Whitcroft. “They take averages and build buffers onto each average, and it is the buffers that often kill you. You end up with far too much inventory because you have built in a week’s buffer on the order cycle, a week’s buffer on the shipping cycle and a week’s buffer on the clearance cycle. That can cost you dearly because if you then try and dump excess inventory in a hurry it becomes expensive.”
8. Keep tabs on market dynamics
Good price management is all about market intelligence. You need to know what your competition is doing and what deals are going on in the market because customers will negotiate. That is not to say you always have to be the cheapest though. Sometimes there is a good reason for a particular deal taking place, such as a company clearing excess inventory in a hurry to bring in cash. “At that point you have to make a rational decision as to whether you want to match the deal or let them take the deal and the hit, waiting until you have the inventory a week later when they will probably have run out at the normal price,’ says Whitcroft. “Those are things you need to understand and they are all down to market intelligence. There is no substitute for having your people in contact with the street and understanding what’s going on.”
7. Understand where delays can occur
Delays in the business cycle are inevitable. You get delays in the order cycle if the customer demand is there but your supplier hasn’t got stock or a shipment is re-routed unexpectedly. You get delays in sales because you don’t have the stock to sell to customers. And until you have made the sales you can’t get the cash in so you get a delay in collections. All of these factors impact cash flow, but that doesn’t mean they should be used as an excuse. “You need to understand those factors and where the delays can occur, and you need to have contingency plans for them,” argues Whitcroft. “Unfortunately a lot of people are very reactive and only tend to look at short-term fixes. But in reality you need to be proactive within your business plan and cater for different scenarios.”
6. Build bridges with your vendors
Vendors naturally want you to sell as much of their product as possible, but it is also in their interests that you are profitable. Have a relationship with them that is open and honest so that they understand the issues you face in your market. “Their first loyalty is to their own bottom line, but their bottom line will be severely impacted if you are not making a profit because you are not going to be able to pay and you are not going to enjoy the business,” says Whitcroft. “If you can develop a strong multi-level relationship where you understand their business processes, order cycles and product lifecycles — and you foster a strong working relationship at all levels of your organisation with all levels of their organisation — you are going to maximise the opportunities and minimise the problems.”
5. Beware the dangers of slashing prices
The first thing most companies attempt to do to solve a cash flow problem is boost sales. Bundle deals, special incentives or just straight price reductions are all methods that can be used to bring in cash quickly if the demand is there. But you need to exercise caution, warns Whitcroft, because success boils down to understanding the trade-offs you are making: “Your cash flow crisis may be so bad that you have to lose a lot of money to turn it into cash and then hope you can make the profits back later to stay in business. But you have really got to drill down and ask yourself, ‘what can I afford to lose, how much can I afford to drop the price to get the cash, and what are the problems if I don’t get the cash in?’”
4. Get the money you are owed
One area that many companies fail to consider when they face a cash flow issue is accelerating collections for sales already made. Whitcroft says firms shouldn’t be afraid of upsetting customers if there is not a valid reason why payments are delayed. “Go and get your money because that is money you are owed!” he says. “You then have to ask yourself if that customer is somebody you want to continue doing business with because if they don’t have a good reason for delaying payment then they shouldn’t be doing it.” He suggests it can also be worthwhile to get senior executives from your organisation involved as well. “If you have got a creditors clerk talking to a debtors clerk, they are dealing from opposite ends of the pack in so much as one is paid to delay payments and the other is paid to accelerate them,” says Whitcroft. “Sometimes what you need to do is get the senior executives of your business talking to the senior executives of your creditors.”
3. Address the excuses before they arise
If there are hold-ups in payments then you need to get the reasons for delay off the table as quickly as possible. Whitcroft says a common problem in the Middle East is that sales are done on an invoice basis rather than a statement basis (such as 30 days from invoice paid weekly) and this often means companies don’t begin chasing their money until the payment is due. That, however, is when the customer excuses usually start. He advises credit controllers to get in touch with customers at least two weeks before due date to build in time for any queries. Alternatively, incorporate cash discounts into your pricing structure cash to encourage prompt payment. “You have to make that discount more attractive than what your customer would get from the bank, but if you look at the opportunity cost of accelerating your cash-to-cash cycle then you should more than make up for it. You should try to push for a good percentage of your business to be on either very short payment terms or cash,” suggests Whitcroft.
2. Honesty is the best policy
If you are struggling to get cash in from customers then see if you can extend payments to your own suppliers or get a short-term loan from the bank. Just make sure it is carefully managed though because repeated delays or a failure to make any payments at all will very quickly destroy your company’s credibility. Whitcroft insists it is far better to be transparent with stakeholders and come clean about your cash flow challenges. “Be honest and work with your suppliers because it is in their interests that you stay in business,” he says. “What is more likely to break the relationship is you being dishonest about when and what you can pay. Far too often here I have seen people muddying the waters by not wanting to admit they have a cash flow problem, and that just causes breaks in relationships.”
1. Make staff aware that cash flow is king
Have people at all levels in all departments of your business tied to incentives that reward the right behaviour. Don’t just pay sales people for revenue, make sure you are paying them on the profitability of your business and the payment terms they are realising. Make sure product managers are being paid on inventory levels and credit controllers on keeping DSO down. Even consider things like paying your drivers for on-time deliveries because if that makes your customers happy then they will be more inclined to pay you. “You should be paying for performance from the receptionist to credit control to product managers to sales – all the way up the line,” says Whitcroft. “Remember that turnover is ego, profit is real, but cash flow is king.”
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