Cash management needs urgent reform

The report found many companies had slack visibility and control of their cash flow.This had impacted their ability to manage the knock-on effects of recession and seizure in the credit markets.

Just 14% of more than 500 chief financial officers across the UK, Europe and the US surveyed said their cash forecasts were on target over the last 12 months, because there is a disconnect between the metrics used by finance functions for forecasting and the way divisions across a business work out their own predictions. In times of financial strain, this slows down the process of effective capital management and puts the business in greater danger of suffering from cash shortage.

“Though the credit crunch may not feel like a blessing for finance departments, it does present an opportunity to push through reforms to how companies manage their working capital,” KPMG says. “With cash in short supply, now is the time to consider installing the processes and procedures to sustain improvements to working capital performance over the longer term.”

Squeezing clients
In its study, KPMG said that about 90% of respondents said that suppliers were demanding early payment on invoices as a result of the credit crunch and that 33% of those claimed there was a seriously adverse effect on their business. A further 35% said their customers were delaying payment of bills which was also very damaging to them. About half of respondents said they had recently renegotiated payment terms with their suppliers to get more time to hand cash over.

The need to squeeze clients and extend payment terms with creditors was a result of companies paying less attention to their cash management processes in good times, the Big Four firm added.

“Once normality returns, and credit is available again, the temptation will be to revert back to bad habits. The task for many finance departments in the years ahead will be to try to ensure that doesn’t happen,” the report warns. “The key is to attend fastidiously to detail ­ to the processes, policies and people that define cash and working capital performance.”