Look Inside, Outside and Across
Try to run your car while neglecting the engine’s oil and the results are predictable. The same is true for running your business without proper attention to managing cash. Where should you focus your attention? Three areas: Inside. Outside. Across.
#1 Inside. Start with the “inside” of your company when managing cash. First, you want to have a firm grasp of all revenue and cash assumptions in the forecast. Do this by going right to the source: the sales organization. With tools like salesforce.com and other CRM-related software, there’s really no excuse for surprises or gaps between revenue forecasts and cash. The CFO and VP – Sales should be talking weekly about incoming orders and forecast realization. Consider too, moving to rolling forecasts as opposed to only annual plans. Weekly, monthly, quarterly rolling forecasts will give you a closer, more dynamic look at the organization. Don’t, however, discard your in depth 12-month look at the organization.
Second, in tough sales seasons, the sales organization might be more inclined to create special terms. That may be OK, but the CFO should be on top of all of the financial and credit terms the sales team extends to prospects, and should have the power to approve or reject exceptions to standard terms.
Third, manage commissions wisely. A good rule of thumb is to hold back the last third of sales commissions until the money is in hand and not just housed in accounts receivable.
#2 Outside. Your second area of focus is “outside”, meaning tight management of receivables and vendors. When receivables go outside of your Net 30 Day terms, start calling customers on day 31, not day 40. Call consistent payment laggards even a little earlier. You will be setting expectations for how you expect to be paid. You also want to be prepared to be tough with stopping shipments and services for customers who are slow to pay. This is particularly important with newer customers.
While you may not be granting much grace in your receivables, you may want some grace extended to you from your vendors. Depending on your relationships with key vendors, you may need to stretch typical Net 30 days to more like Net 60 days. Be warned, however, staying under Net 60 in your accounts payable will keep you off your vendors’ radar, but you don’t want to go out to 75 days. Your reputation runs a major risk of getting dinged, and there could be pricing implications… word spreads fast.
#3 Across. By “across”, we mean that you leverage every tool possible across available financial vehicles. For example, we
always recommend to any company with cash balances of six figures and above to have sweep accounts, as in “sweep” your cash into an interest-bearing overnight account.
Another caveat: while it’s good for your cash to be working for you, don’t keep your primary cash accounts too close to zero. Banks need to make money and they are always watching. Have a chat with your banker, to make certain that you are in sync. They may be more than glad to execute a sweep account if they manage your “available” cash for you . You’ll need a track record of a healthy cash account just for aesthetics and if the need arises to get some additional capital. Investors and creditors like to see healthy cash amounts.