Finance Professionals Need to Return to Basics

by Aubrey Joachim, Immediate Past President, CIMA , 21 June 2010

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topics:
Asset and Project Financing Corporate Finance

tags:
accounts receivable activity-based costing cash flow cash management CIMA credit practices Days Sales Outstanding sale-and-leaseback

At the peak of the credit crunch, international companies like Temasek in Singapore, Marks & Spencer, John Lewis Partnership and Taylor Wimpey, which were thought to be resilient, sent out signals that they were feeling the squeeze. Having witnessed such vulnerabilities, every business should take cues and be mindful of its funding requirements in the current environment.

The current problem is not just a lack of liquidity in the money markets. Despite current reports of economic recovery gaining momentum (albeit slowly), companies are starting to look at cash flow with a newly critical eye, hoping to avoid the nightmare of falling revenues unmatched by lower cuts.

Cash-Flow Visibility

Cash monitoring and forecasting may not be the most strategic or interesting parts of the CFO’s role – in fact, they’re delegated functions. But given the lack of liquidity and looming economic difficulties right now, CFOs are expected to be aware of their cash position at any point in time.

Whereas net-income forecasting was sufficient in the past, many investors are now requiring companies to produce a rolling twelve-month cash flow forecast. That means having the right tools in place to be able to track data throughout the ‘financial supply chain’ in your own organisation, and having consistent management information.

According to the late George Moore, founder member of the Society of Turnaround Professionals, having an accurate cash forecast can spell life or death for a business during a downturn. ‘A realistic and well-researched cash flow forecast 13 weeks out will pick up sudden increases in sales and costs,’ he told Real Finance magazine in 2006. ‘It’s pretty straightforward to work in the payments side – the salaries, taxes, leases and supplier invoices. All you have to do then is estimate the collections you’re sure about and you’ll see straight away what you’ve got to do in terms of sales and improved collections.’

Outgoing figures are also vital: activity-based costing, for example, can highlight overhead costs that can be eliminated and unprofitable lines that should be the first on the chopping block.

One aspect of working capital often obscured from management is disputed invoices. Struggling clients will be managing their own working capital, and that can mean late payments or haggling; more complex disputes can put large sums into the dreaded ‘120+ days’ column. Rather than festering in the bottom drawer of an account executive, disputes that are quickly raised to management’s attention, then to the director level, will be better solved. Fast decisions can be made about potential refunds, negotiations with client decision-makers can begin, or legal action can be taken.

Companies are increasingly adopting integrated systems to automate cash-related processes. Large companies can take this one stage further with centralised shared services and outsourcing. Again, the credit crunch and economic downturn are very persuasive arguments for a general tune-up in finance function efficiency – and creating visibility in cash flow should be a prime driver.

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