We saw the following from CBC News: “Recession over, Bank of Canada says”.
Great, but: unemployment is still high, there still isn’t growth in all sectors, Canadian consumer confidence is still growing, and many companies have not fully recovered. All this affects Cash flow, which is one of the most important part of any company’s operations, and even more so because the economy has not fully recovered.
Insufficient funds to an individual is frustrating especially if you write a cheque and it is returned. The result is NSF charges from both the Bank and the person or company you wrote the cheque to. We then have to make the embarrassing call to apologize and make restitution for the missed payment.
Insufficient funds to a Company (or more commonly called “Negative Cash Flow”) rarely means writing cheques for cash that they do not have. Fortunately most companies (or at least the ones that I’ve worked with) keep good accounts of their cash on hand. Cheques are not written without having the funds unless it is a post dated cheque. If that is the case, then the company has the responsibility of ensuring the funds are in the bank on that date. So the first step is know exactly what cash is on hand, and don’t forget to include your post dated cheques as well.
The type of insufficient funds or Negative Cash Flow I speak of arises from companies spending more money than they have. There are many reasons for this, such as:
- Insufficient working capital,
- Low margins
- Unnecessary expenses
- Paying too much for necessary expenses
These are all topics on their own, and we’ll address them in the not-so-distant future.
The continued lack of funds can lead to: a bad credit rating, penalties and interest expenses, etc. Not only is not being able to pay bills embarrassing, it could also cripple the company if serious enough. It is imperative that we work with all suppliers to make sure they are paid, especially those who provide essential products and services.
When the situation is bad enough, the suppliers could place orders on hold, the result of this could be disastrous to the business. Once essential products and services are no longer available to the company the company is no longer able to produce product/services for sale and consequently has little or no means to generate revenue, which in turn further impacts your cash flow woes.
Further problems would include not being able to meet the payroll (staff would refuse to work), pay taxes (which the companies Directors would be personally responsible for). Again if the product/service is an intricate part of the process; it could also cause a complete shut down. Eventually, the Bank could call in its operating line of credit. Creditors could put your company into receivership and could close the company. Government could go beyond the organization and go to the responsible individuals for payment etc. of any outstanding sales and withholding taxes.
If your company is facing this situation it must be addressed now, and if it isn’t, make sure it doesn’t happen, so second make sure you have a plan for cash disbursements. Review your Accounts Payable as you would your Accounts Receivable. Make sure your cash is coming in on a timely fashion, and as it comes in, pay the essential vendors first, and then make sure to pay everyone else as soon as you can.(unless the payable is in question) After all, we don’t want to be the source of problems for other companies.
In one company where I worked in a Contract Controllership Capacity.
Note: These positions call for a well-developed Consultant to take over for a Senior Accountant (Accounting Manager, Cost Manager, Finance Manager, Controller, VP of Finance, Director of Finance, etc.) who has: taken some leave, is working on another project or has left the position.
The period is usually between a few weeks and can go as long as a year or more.
One of the first things I discovered was that the company was in a negative cash flow position. Senior Management was unaware. In a matter of days, all the symptoms of this problem began to appear.
In my capacity as the most Senior Person in Accounting: I was receiving calls from vendors when our Accounts Payable department was either unable to pay them what they were asking for or were unable to tell them when a cheque could be issued The Purchasing Manager was calling saying that companies wouldn’t ship unless they were paid in full with the purchase order, and individuals and companies providing services would no longer provide those services without arrangements being made for payment at the time of the service being made. The operations Manager called saying that the inventory for essential materials was dangerously low.
I phoned and met with the President who had contracted my services and let him know of the situation and also advised him of a solution. We then held a meeting with the Managers involved and we developed our plan. This is the third step communicate the situation with those involved and co ordinate a plan of action.
The fourth step; execute the plan of action. This is where we determine when cash is scheduled to come in and when payments are due, and will be paid. Leave yourself a buffer of say 15% for any shortfalls in receipts. Make payments as funds begin coming in. If you have to defer payments let your vendor know. Meet with your A.R. and A.P. team leads as often as required. In this case, we were meeting weekly; however, we kept each other abreast of any developments. This was a huge challenge for us, but the team rose to the occasion. They took it as a challenge and they were triumphant. We usually could come up with the cash when we really needed it or were able to get a short extension when we couldn’t. I also met with the management team weekly and we kept each other up to date of any developments. Step Five therefore is get the buy in and participation of all the lead players. I cannot tell you how important it is to gain the acceptance of any goal or initiative. We could not have achieved the results as successfully and as quickly as we did without the enthusiastic thrust of all involved. The same management team also looked for any areas within the company where we could reduce our expenses. Note: This is step six; however, it is an essential part of any program, and one that I’ve always believed is very important, and will address in a future article. Good Luck.
Please note: Please provide your comments and any tips you have to improve cash flow to: pcalleri@thegaap.net
