Strategic Cash Management: Setting a Foundation for Enhancing Your Financial Position

There is a change in the focus of cash management, in which the treasurer’s role as a strategic asset and planner in an organisation has come to the forefront. This is particularly true in this current, uncertain economic climate.

It is essential that back-to-basics concepts are a core component of strategic cash management. Many companies have been conditioned to have their cash inflows directly tied to their cash outflows. However, now is the time for corporate treasurers to look at each of these functions independently. Addressing each of these functions separately will help to put treasury in a strong position in the years following the recession. If this recession has taught all of us one thing, it is how critically important it is to be prepared, and it’s well past time to rely on ‘we’ve always done it that way’ concepts and processes.

The first step is to develop a go-forward plan that serves as the blueprint for an organisation’s cash management strategy. With this plan, companies can evaluate their payments and receivables functions, as well as its banking relationships. This evaluation process will afford companies a more effective approach to working capital management. Some actions your business can take are detailed below.

Evaluating Receivables

Some businesses are continuously waiting for payment in order to make their own payments. This is a vicious cycle that a business should avoid at all costs, as it is detrimental to an organisation’s entire cash management process.

Instead of succumbing to this trap, companies need to evaluate its current client payment terms. This includes taking a closer look at payment deadlines. It is imperative to be cognisant of the payment terms currently in place, since aging receivables have a significant impact on a company’s success, and more importantly, its bottom line. Review the current payment terms for each client. See if there are ways to incentivise for timely payments.

Some companies offer a discount to those clients that regularly pay on time . Another option is to tighten the payment timeframe from 30 to 20 days and, once again, offer discounts to those clients who adhere to those terms. Some companies also offer trade discounts for customers that pay electronically. This saves the client both time and money, and your company will receive its payment quicker since the funds will be electronically transferred. There are a variety of options, but it is critical to select the option that will benefit your company the most. It is important to remember that not every solution is a fit for every company since needs, payment structure and clients can differ drastically.

Also, review which payment channels are being used most frequently, and which ones are not being used at all. Take the time to survey your clients to obtain their perspective on what payment channel is the best for them. This brings us to the cornerstone of evaluating your receivables process: to gain a better understanding of your customer’s payment preferences.

Take time to discuss the payment options that are available, and find one that is a win/win for both parties. For example, one company elected to use a lockbox for its receivables. Yet, customer payments were sitting there for days. If this company had reached out to its customers and learned of their payment preferences, they would have seen a shift to electronic payments would prove to be the most efficient and viable option for both.

Finally, evaluate your entire invoicing process. Consider the following when reviewing this process:

  • How do you invoice? Is the invoice mailed, sent electronically or included with a shipment?
  • How frequently do you invoice?
  • What are your current payment terms, and how can these be improved?
  • Is the company currently granting credit extensions?

The answers to these questions will allow you to develop a receivables strategy that is all encompassing and ensures that the receivables process is efficient. Essentially, this evaluation comes down to the golden rule: treat your clients and vendors as you expect to be treated.

Evaluating Payables

Take a moment to ask yourself the following questions:

  • Do you treat and handle your clients in a better or worse manner than your suppliers treat you?
  • Do you look to your payables problems and processes to provide guidance and improvements to your receivables process?

Synergy between the receivables and payables processes is a necessary back-to-basics step businesses need to achieve.

One of most critical components to an efficient payables function is to have a full understanding of all your vendor payment vehicles that you can use to make payments. Each vendor will vary with payment options, but make sure that the ones selected are the most efficient for your business.

Next, look at the payment channels your suppliers have established; simply, how can you ensure your vendors are receiving your payments on a timely basis? Do they only offer mail-in payments? If so, are these payments tied up in a lockbox? This is crucial to know if your business needs or does not need float time. Is automated clearing house (ACH) a payment option? It is of vital importance to understand what channels are currently available to you, and what is best for both your business and the vendor.

Also, these types of conversations ensure that you are paying your vendors how you want to be paid. Just as you work with your customers, work with your vendors to make sure you are paying on your own terms.

During these conversations with vendors, also learn where you sit on that company’s supply chain. Remember, you do not have to be a powerful, multi-billion dollar company to receive strong payment or trade terms. Sometimes, the most powerful companies are those that have a strong record of timely payments. Kknowing where your company stands on a vendor’s supply chain can help you demonstrate to them how you can help their business’ receivables function become more efficient.

In addition, examine how you are being invoiced. Is it too frequent? Is it mailed to you, when an electronic distribution method would be more effective? Detail how your company wishes to be invoiced and discuss with your vendors. By detailing the invoicing process with them, you are providing them with the confidence that your payment will be made in a timely fashion, based on the agreed-upon terms, channels and overall process.

Are you wondering how evaluating both the receivables and payables process can benefit your organisation? One company examined its receivables process, and, in turn, reduced its customer payment terms by 20 days. The same company then looked at its payments process. As a result, it increased its payment terms to its own suppliers by eight days. The result: US$3.5m in capital back in the bank.

Evaluating Bank Relationships

As a result of the financial crisis, more businesses are beginning to take a closer look at their current banking relationships. A strong financial institution is important to weathering any future financial storm that may arise. It is critical for companies, regardless of size and industry, to develop an evaluation process for selecting its bank. Items to review and analyse include:

  • Credit ratings reports.
  • Market capitalisation.
  • A bank’s investment in technology.
  • Product offerings.
  • Capital ratios.

Working with a bank that is in a strong position can help your business better position itself as well. Bankers can offer options and solutions that meet your business’ needs. Discuss with them all of the cash management products and services available to you. If they are unable to assist you, ask them for suggestions of those who can.

Since this most recent financial crisis, we have learned that planning is crucial. The bottom line is to be consistent: use the same evaluation measures for your receivables process as for your payments process – just put yourself in the role of customer. If you do this, you will have a thorough picture of your cash management structure and solid positioning to move forward.


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