When Carillion collapsed the one time multi-billion pound building and services group’s capital position had fallen to the point it had only £29 million left in cash. It was an astonishing revelation that showed how badly the company had been run.
In every sense the corporate disaster is a wake-up call for finance directors to get their own houses in order and make sure they have the best possible working capital system in place.
Peter Williams, chairman of online fashion group Boohoo.com, who has held a number of senior finance positions including CFO of department store group Selfridges, has front line experience of challenging times.
“It’s a truism that companies have often collapsed, not because they’re unprofitable, but because they’re out of cash,” says Williams, who is also the Senior Independent Director of property website Rightmove.
“We are lucky that all of our businesses have a strong cash position, so cash concerns are quite low. But I once worked with a company where I didn’t know if I would have enough cash to pay suppliers the following week,” he says.
Williams says: “In that situation, when dealing with suppliers, you have to be honest with them, you can’t just say the cheque is in the post if it isn’t, as credibility is then shot. If you don’t know when you are going to be able to pay you have to say that it will be sometime next week or whenever is likely- then agree to call them then rather than set a false premise and having them trying to figure out your position.”
Improving your position
Philip King, chief executive of the Chartered Institute of Credit Management (CICM), urges companies to take action to protect their working capital as he says many may have become complacent in the era of low interest rates. “Corporates may have built up a false sense of security,” warns King. “That may not have prepared them for a rise in interest rates and the effect of Brexit, which may be challenges out of their control,” he says.
King advises finance directors to put in place measures to protect their working capital such as agreeing payment terms before the company starts a supply contract. “Try gaining agreement on 30 days rather than 90 days, and maintain communication on the possibility of seeking payment interest and charges, and think carefully about the relationship with the customer if there are continued slow payments,” he adds.
In order to improve their working capital position, finance directors should implement a cash-focused management system, says Bastian Krawinkel, a senior director at REL Consultancy (part of the Hackett Group) which advises on working capital issues.
Krawinkel, says the way to make sure that cash-focused management happens is to cascade key performance indicators (KPIs) on working capital down the business to operational level. Then make sure that the KPIs are aligned with individual manager’s responsibilities. “Most companies struggle when it goes beyond finance, but actually what is required is cross-functional collaboration,” he adds.
Cash management should be an active process, says Krawinkel, linked to improvements in working processes and procedures. “It needs to be entrenched at the operational level, by asking everyone- what does it mean to me?” he says
Krawinkel calls for awareness training on the importance of cashflow across companies. “On one level it’s about awareness, but the ultimate aim is to achieve understanding at every level of an organisation,” he says.
E-procurement can be a way for finance directors to control cash going in and out of a company, says Daniel Ball, Director of consultancy Wax Digital. “It can curb maverick spend ,ensuring better adherence to budgets and reducing costs. It also introduces all of the required checks and balances to ensure spending across the organisation is closely controlled and authorised.
“But most importantly, by providing full visibility of spend from purchase order to payment it can help the business see what available cash it has at its disposal any given time. Without e-procurement working capital is partly left down to guesswork,” says Ball.
The extent of savings that can be achieved through e-sourcing tools varies depending on how much the organisation is currently paying for something compared to competitive market prices, the spend category in question and the process costs associated with running tenders and sourcing events manually, says Ball.
“In many cases the savings potential is significant, typically double digit percentages. However the cost benefits should be measured in terms of both the actual potential savings on category spend based on agreeing and negotiating new prices, and on the internal time savings generated by introducing electronic processes.
“One word of caution is that e-sourcing is a great way of highlighting potential savings on category spend, but unless it is underpinned by the compliant purchasing processes offered by purchase to pay systems, those savings may not be fully realised,” advises Ball.
Another option is participating in e-auctions which Ball says can play an important role in electronic supplier sourcing but should ideally be used as a part of a wider e-procurement toolkit. “In particular, for simple spend categories where there is little distinction other than price between one supplier and another, e-auctions are very effective in creating a level playing field and seeing how low the unit price can go,” says Ball.