A RECENT CFO survey by Deloitte highlighted the importance of cost control and cash flow management. However, the dynamics of a competitive and fragile market has led many businesses to focus on prioritising growth opportunities and hoarding cash reserves to fund working capital, leaving cash flow as a secondary concern. As a result, delayed payments are leading many professional services organisations- those who bill clients for their time and services- to function often unwittingly, as a bank for their clients.
This environment has dramatically increased the need for delivering projects on schedule and performing timely and accurate billing for all projects so cash flow can be maximised in areas firms can control.
However, businesses have instead put an ever increasing amount of effort into growing sales and revenues with fierce competition and new business opportunities thin on the ground. This means that many firms are accepting payment terms that were unacceptable several years ago as a condition of winning new accounts and are finding that for existing clients, terms are being stretched further and further. The consequences of such late payment terms can be dire. Recent data from Clydesdale and Yorkshire banks for example revealed that one in ten business owners believe that they would have to scale back operations or even shut down if their customers took more than 90 days to pay invoices.
By conceding on payment terms, or sending inaccurate or late invoices, business are, in effect, providing interest-free loans to clients, involuntarily acting like a bank by ‘loaning’ their services. These ‘loans’ put a strain on cash flow, cost the business money, and could lead to a situation where there are plenty of orders in the book but no money in the treasury.
The liquidity problem among businesses is worsened by the fact that many companies still find it difficult to borrow money and take out new bank credits. Even prosperous European businesses are finding it harder and more costly to come by loans due to the uncertainty surrounding Euro zone debt. According to Reuters, pressures from various financial regulations to increase capital buffers mean that while banks may be willing to lend, they are taking a very cautious approach when assessing who to lend to.
When professional services organisations are able to manage, measure and improve cash flow, they benefit from increased credit control and improved forecasting. This happens only if they stop behaving as a personal lending service to clients if they can and/or they set improved liquidity as a clear company objective.
So, what steps can firms take to avoid being a substitute bank for their clients and even increase liquidity throughout the organisation? It is important that employees brokering client deals understand that conceding on payment terms can have a negative impact on cash flow and is similar to providing an interest free loan to customer.
By making the organisation aware of this, conceding on payment terms should be avoided in the first place or at minimum used as a key negotiating tool in the sales process. If a customer effectively wants a loan, raising the deal price accordingly or receiving other concessions – like getting the customer to assist the firm in marketing their services (e.g. customer acting as a reference, agreeing to do referrals) – can turn a negative situation into a positive. By discussing the issue proactively with the customer and not simply conceding to their payment term demands, a win/win compromise is much more likely to happen.
Two common areas of opportunity for improvement are better project management and improved timekeeping. Controlling cash flow in an organisation is a tough task so strong project governance is needed. In large projects with greater complexity and a large number of project team members, it is important to have project management and resource management tools that keep projects on schedule and on budget so you can get paid on time for the work completed. In addition, having foolproof timekeeping systems in place, that work in tandem with project and resource planning systems, ensures all time is captured and billed quickly and accurately. This translates into cash being collected as fast as possible.
Maintaining and improving cash flow will and should remain a business priority for organisations in 2012 and beyond. Hiding or ignoring cash flow problems and acting like a bank to clients is a considerable risk even for growing and profitable companies. Try to avoid acting like a bank if possible – and if business needs dictate that you need to be lenient on payment terms, it is best to have a rigorous technology infrastructure and sound business processes in place to maximise cash flow in ways that you can control.
Neil Davidson is managing director UK, Deltek
Debt financing opportunities are getting ever more interesting, writes Antony Perring, CFO of LEON
During Brexit, cash flow is your only certainty, explains Michael Facey, head of marketing and product management, OnGuard
Business whose operations span a number of sectors and a broad variety of projects put immense demands on FDs and their supporting finance teams
For any CFO of a PE-backed business the prospect of entering a dual track sales process can be daunting