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 [email protected].
