Type ‘cash flow management’ into your search engine and what do you see? All of the top cash flow management articles rely on the same two practices that ostensibly improve cash flow:
1) give discounts for faster payments
2) don’t pay your payables until the very last minute.
There are two problems with this advice: it’s bad math and it’s bad ethics.
The math problem costs you money: if you’re not remitting payables until the last day, then you’re not taking advantage of the 2% discount your providers offer. It follows that if you’re giving a 2% discount to get your receivables in faster, you’re creating negative cash flow. Example: $100 AR, 2/10 net 30. Customer pays $98 on day 10. $100 AP, 2/10 net 30. You pay $100 on day 30. You just lost $2.00. How does this make sense?
Aside from the bad math of this advice is the ethics of it: why is okay for your company to entice buyers to pay you sooner, while you pay at the very last minute? Don’t you think your providers need the cash just like you do?
Ethics is a value that either permeates the entire company or doesn’t. If you think, “We’ll this is what everybody does, it’s not really an ethical problem,” where else will you fudge a little?
Address both the math and the ethics
The problem with typical thinking about cash flow management is that it starts and end with how to we manage the cash coming in and going out.
True, effective cash flow management starts at a far different place. It begins with terms and conditions that require advance payments. You reinforce the importance of terms and conditions when you choose value based pricing over hourly billing. There’s no excuse for any system that doesn’t generate daily cash flow reports for everyone.
The math and the ethics problems disappears: Both your AP and your AR are paid and received timely for the good of both parties.
Why cash flow reports for everyone?
Deloitte speaks about a cash management culture:
Embedding a cash management culture within your organization requires management buy-in. It’s imperative to establish, communicate and implement standard policies across the organization. Cash management policies should focus on budgeting, forecasting and financing and indicate how to handle day-to-day activities such as collections, procurement/ordering and payment.
Keep in mind, too, that cash flow management is not just a finance issue; it’s an operational issue. All departments – from sales and marketing, procurement and production to finance and treasury – must coordinate for optimal results. To drive this point, many leading companies actually link staff compensation to achieving specific cash flow targets.
“All departments must coordinate for optimal results.” Wow!
A niche consulting firm was sick of negative cash flow, messy and disorganized time sheets, and fighting for every hour of billable work. There was high resistance to value based pricing and terms and conditions requiring payment in advance among the staff of consultants. They finally agreed to attempt it with a segment of their clientele. There was sweat, blood, and tears as they surmounted the various obstacles, most of them in their own habits and mindsets. After two months this segment of clients all accepted the new terms and conditions, the consultants were making it work and cash coming in was exceeding cash going out. The founder commented “It’s like the cash is managing itself!”
What would it mean to your company if you combatted the standard practices regarding cash flow? If the cash managed itself? If you’d like to explore this, call/text 703-801-0345.