Cash Flow and Managing Accounts Receivable

Cash flow is justifiably the most haunting topic. It probably keeps every entrepreneur awake at night at some stage in her life. It is hence quite surprising to see how often it is relegated to a low priority issue, if not neglected, until a crisis erupts. Not only can taking your eye off the cash flow result in a very dangerous situation, it may lead to costly ad-hoc solutions and major disruptions in the organisation.

In my opinion there are two ways to prevent this issue in a preventive way: planning and strict accounts receivable management.

Planning

Startup companies may be tempted to resort to a multitude of excuses not to plan ahead. Be it because they lack the resources or prefer to prioritise other areas of the business. Even more established mid-sized companies sometimes do not consider it necessary to plan ahead based on the argument that their business is steadily and predictably developing.

Nothing could be more wrong! By having a cash flow forecast in place, companies of any size and maturity can ward of the surprise of a cash flow squeeze. The advantages of even a very crude and approximate cash flow forecast outweighs the effort it takes to prepare and update it. A forecast can be a simple spreadsheet or be more integrated by being linked to the accounting system.

Remember the days of the written ledger? No, probably not.

Accounts Receivable Management

The first thing to be aware when it comes to A/R is that time is not your friend. Putting it out of sight for only a short period of time may lead to an accumulation of issues, which then require extra effort to work off. Managing receivable deserves the same attention as sales and asks for a rigorous process from beginning to end. After all, a sale is only completed once the cash is in the bank.

1.Clear payment terms: payment terms should not only be included in the general terms & conditions in a sales contract but also clearly stated on the invoice itself.

2.Automated dunning process: humans are, unfortunately, unreliable when it comes to executing processes each day. It is hence good that automation can compensate for that shortfall and, actually free humans for better and more interesting tasks.

3.Constant monitoring: in spite of having a strict dunning process in place, customers do fall behind with payments sometimes. In order to stay on top there are two tools: (a) aged receivable report and (b) daily bank reconciliations. Technology-based accounting software such as Xero can help in this aspect. Automatic feeds make bank reconciliations easy to perform and actualise aged receivable reports daily.

4.Discipline:it is best practice to agree on comprehensive key performance indicators (KPI) and to monitor and review these periodically.

5.Delegate: accounts receivable management, if properly set-up and trained, offers itself for delegation. An entrepreneur should free herself from having to follow-up routines on a daily basis and rather turn her attention to more unstructured issues.

Ad-hoc Accounts Receivable Management

However, sometimes life happens, so to speak,and the best practice approach gets disrupted.

If a key person goes on annual leave or gets sick, responsibilities get reassigned; these are instances that can easily occur. Inattention can then result in a situation where accounts receivable balloon within a short moment of time and affect cash flow negatively. Another possible scenario is that within the normal course of the business a special situation requires added cash. Examples are: marketing campaigns, development of a new product, a hiring effort etc. Absent a bank overdraft facility, there area number of measures that can be initiated as a one-off action:

Special collection effort of receivable: the first step is to set priorities and decide where the biggest amounts can be collected fast and with the least effort. This is followed by a determined and sustained collection effort.

Early settlement of receivable:this is the agreement with customers to incentivise early settlement. The drawback of that approach is, of course, that it attracts a cost in the form of a discount on the outstanding receivable. Whilst this can be done as an ad-hoc measure, there is also the more formalised alternative of factoring invoices.

Trade-off between different cash outflows. This is another way to boost cashflow. Postponement of non-essential purchases or the negotiation with suppliers of postponing payments are two of the most used instruments.

In summary, receivable management and its direct link to cash flow deserves to be in the focus of every company. The payback of well organised processes and reporting is huge in comparison to the damage that is done by a cash flow shortfall. It is thus comforting to realise that an entrepreneur has a diversified array of procedures, tools and action steps at her disposition.

Stephan Hablutzel is Chief Operating Officer at Fresh Accounting Ltd. Prior to starting with Fresh Accounting Stephan has for over 25 years resided and worked in Hong Kong and Singapore in regional roles as CFO and COO from startups in LegalTech to multinational groups in the fashion and lifestyle industry. He held numerous directorships and sat on various Board of Management. Besides finance related expertise, he brings in-depth experience in legal and international tax matters, corporate governance, restructuring and project management. Stephan holds a degree in Economics from the University of St. Gallen in Switzerland and holds the rank of a captain in the Swiss army.