Managing Cash in a Recession Dr Ruth Bender March 2009 SM
As times have got tougher it is even more important to keep an eye on the numbers in a company. One important aspect of keeping an eye on the numbers is keeping an eye on cash flow. Now to examine this aspect in detail, we are going to talk today to Ruth Bender. Ruth, I guess at the moment accountants have come into their own? RB We were always important, Steve, it’s just occasionally people don’t remember that fact. SM Now remind us, what is cash flow management, and why is it so important in this current downturn? RB OK, well, it’s about making sure you have enough money to pay for what you are buying. Basically making sure the company has enough cash to be able to meet its obligations and keep going. It has always been important, but as with accountants, people in the good times have forgotten about it and focus more on other things. But what you need to do is you need to know what your obligations are and how you are going to be able to pay for them. SM So is cash and profit a distinctly different thing? RB Completely. The way I explain it in the classroom is you cannot take your profit and loss account down to the local Lamborghini dealer and hand over your income statement and say please can I have a Lamborghini – it doesn’t work that way, you need cash for it. I think the best way it was ever explained to me was by one of my clients when I was an accountant in practice, who said “look I can carry on making a loss for many, many, many months, provided I don’t run out of cash to pay the wages on a Friday.” And that is fundamental to it. Ultimately it’s profits that create cash for you, but there is a big time gap between the profit bit and the cash bit and you have got to monitor the cash always to make sure you know what is there. SM So what are the signs then that things are going the wrong way? You mention about paying the wages? RB Signs that you might see internally are you are running up against the headroom on your bank overdraft or you might find that customers who Dr Ruth Bender
used to pay you promptly are starting to pay more slowly, or perhaps aren’t paying you the full amount but are paying you something on account – which should be a warning sign that they have got problems. Or you might just find that you are having to tweak things and not pay somebody this week who you normally would have, but to pay them next week. Or, if you have got any sense at all, you are doing a cash flow forecast very regularly and in detail and you can see that three months, four months, six months down the line there is going to be a gap. And if you have that cash flow forecast then you can do something about that gap now rather than it coming on you unexpectedly. SM Now that is one aspect of a question that I am going to ask you, that is what should companies be doing in response to this cash flow situation? RB OK. I think there are four main things. The first one is you need to manage cash. So you need that cash flow forecast in great detail – receipts and payments – to know what is certain and what is discretionary and that sort of thing. The second thing they ought to be doing is managing working capital. Basically inventories and debtors. There is almost always some slack in there – and particularly the debtors. Debtors is your money in somebody else’s bank account and that is just so wrong. So companies ought to invoice promptly and invoice accurately and not be afraid to chase up as soon as the debt is due, or preferably before then to get the money in. And with inventories, you need to have enough inventory to make sure the business works properly, but many companies carry way too much stock. You need to have a look at that as well. So, so far we have got cash flow forecasts and working capital. I think the next one is cost cutting. And these days we all know about cost cutting. What you are looking at is you are looking to see, OK if we are spending this money, what value are we getting from this money? What can we cut in the short term with very little impact? What can we cut that will have an impact, but we can get around that in some way? And what really doesn’t need to be spent yet? And then the fourth thing is you have to remember to keep selling. If you don’t keep selling you don’t have a business. So in amongst all that cost cutting and working capital management, you have to keep the front line going. SM That’s some very useful pointers. One of the things that seems to come out of that for me is, although I made a joke about the finance people, lots of people need to be responsible for cash flow management? RB Yes. The finance people are important because everything comes together on that cash flow forecast and the bank management of that sort Page 2
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of thing. But the finance people can’t do your selling. And to be honest, the finance people can’t do your cost cutting because what you need to do to do good cost cutting is work out the areas where you might be able to do something and then put the operational people in charge of that because they know far better what can or can’t be done. But likewise with working capital management, as an accountant I can look at your inventory return and say well to be honest compared to our peers we have got far too much inventory, but I cannot go onto the factory floor and say we don’t need that or that or that. It’s an operational thing. One of the big things that needs to come from the top of the business, and I include the finance people in that, is the culture change. We still have people – we still have people with fight back going “well we are OK, we are selling things, we don’t have a problem. “ Well, I have been in business through three recessions, and I know that there is a problem, and I know that even if the problem hasn’t hit you now, within a year it will have hit you and it is much easier to start doing the cost cutting now than it is when it is urgent. SM That’s a sobering thought. RB Sorry about that. SM If we talk outside a manufacturing sphere where you can actually physically see cash being tied up, does it apply to service businesses too? RB In some ways it is worse for service businesses because when I talked about working capital, I talked about inventories and debtors. The other part of working capital is creditors and one way companies manage it is to delay paying their suppliers, which I never talk about because I don’t approve of it. But in service industry your main supplier is your staff and you can’t really delay paying them. So service industries lose that aspect. And we don’t have inventories – we don’t have boxes of stuff lying around, but we do have work in progress. And we have people spending time on things that they might not be invoicing. So we have a build up of work in progress and then we might have a build up of debtors as well. So I think for service companies it is just as important and in some ways it is more difficult because there are fewer levers you can pull. SM So if you were to leave a message that you would like people to take away about cash management, what would it be? RB I would focus on forecasting it and the reason I would focus on forecasting, it is sometimes it’s only when you actually see the results of that, month by month, or week by week, forecast that it becomes very real in your business and then you realise the need to take action on all the other things. Page 3
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SM Some timely reminders there, thank you very much Ruth. Page 4