Feb 11th 2010
By Todd Wilms
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We love our secrets: our secret sauce, secret societies, the secret of our success, trade secrets, and our secret weapons. It is that one thing that sets us apart and all but guarantees our inevitable success.
However, the shift in our global economy has made finding that secret problematic for most organizations. We land on platitudes like “cash is king,” or sterile efforts like incentives – for sales and customers alike. We tend to look externally for our answers when they usually lie within. Your greatest secret weapon is…your accounts receivable department.
Before we start down this path of accountants saving the day like some teenaged boy’s comic book adventure story, there will be an inevitable kneejerk reaction that sales – or new revenue – will drive your company from economic hardship. No argument. New growth will be the best way to thrive in the new economy. Can I get an “Amen?!”
But, it will all depend on how you look at it – the term “growth” – and in that is where the secret lies. While most of the globe focused on practices to reducing spending – ways to tighten their financial belts – practices to improve liquidity were a missed opportunity in 2008 and 2009. However, it is within your ability to manage your working capital through your A/R organization that will prove to be your secret weapon.
CFO.com and The Hackett Group, Inc., through its REL consulting group, performed an annual survey among the 1,000 largest U.S.-based companies. Their 2009 results showed that this group dramatically reduced days working capital (DWC) by 6.4%, and their days sales outstanding (DSO) by 11.9%. Almost 80% overall reported some improvements to both DSO and DWC. The results were a recovery of $62.7 billion in working capital, up from a meager $7.2 billion from two years ago.
While impressive, this represents little more than a veneer to the bigger problem. As was pointed out by CFO.com and REL, the top 250 companies carried the burden for these results. Another $776 billion in cash could have been realized by the bottom 750 companies. If these monies had been reinvested in the company or the market, a very conservative $8.4 billion in new revenues could have been infused into these organizations. Put another way, each company – on average – lost $8.4 million to their bottom line, not to mention the customer impacts, opportunity costs, and valuation costs to the company by not capitalizing on some sound fiscal practices.
A/R for growth
Last year there were several companies whose growth coincided with their focus on the receivables process. When the January 2010 FTSE (the Financial Times and London Stock Exchange company) Global 100 was published, there were three notable U.S.-based organizations on that list:
Amazon – Its 113.2% change in stock price for the last 12 months ranks them 5th of all global organizations.
Apple– The company’s 113.1% change ranks them slightly behind, in 6th place globally.
The Ford Motor Co. – Its 479% change in stock price ranks them 3rd in the U.S. rankings.
Amazon, Apple, and Ford all had measured and remarkable improvements in their DSO and DWC over the last year. Amazon had employed a 20% year-over-year improvement in DSO; Apple had a 36% improvement in DWC last year; and Ford had an impressive 56% improved DSO and 53% improvement in DWC last year alone. These organizations focused on managing their working capital as a critical lever for their success during a downturn.
Conversely, an established pharmaceutical laboratory and a global food group both performed in the 3rd and 4th quartile, respectively, in the REL survey and were among the bottom 10 in the FTSE global list. Each organization showed positive growth in revenue, but languished in their receivables process.
Cash in versus cash out
Organizations still focus their energies on forecasting and managing cash-out and forego cash-in forecasting. In fact, when the American Productivity and Quality Center (APQC) polled their members, only 5% responded that their cash outflow forecasting was poor; where as 26% of that same group responded that cash inflow forecasting was poor (almost 60% said “no more than adequate”). Merely one-third of respondents stated that capital management was reviewed or discussed with the executive team ONLY when emergencies arise.
Most organizations have not fully aligned to the new economy and transformed themselves from the days of easy money. Unfortunately, managing their working capital relies heavily on tightening their cash outlays and less on effectively liberating their working capital from the receivables process.
What to do about it?
First, recognize that you are probably not focusing your energies on A/R as part of your capital management strategy. Most finance organizations stop after cost-cutting exercises and then lean on sales to bring in new revenue.
Second, seek help. Your spreadsheet is not a financial solution. Your collections/receptionist/Starbucks-runner-who-knows-just-what-color-you-like-your-latte/temp is not a solution. Find knowledgeable organizations and people to help you through this conversion. Develop a strategy to utilize your existing resources appropriately and then fill in those gaps with outside help.
Third, don’t lose sight of your customers. A critical failing is to suddenly (and without warning) tighten your collections process and leave your customers adrift in your short-term solution wake. Don’t risk long-term customer relationships for low-hanging fruit gains.
Effectively managing your cash is no easy task. However, focusing some of your energies on managing what is coming in instead of just what is going out will quickly improve your liquidity. Rely on data from your team to help you through this process. There are smart people around you to help if you steer them in the right direction. You probably have a superhero in disguise right down the hall. Clark Kent really should have been an accountant!
About the author:
Todd Wilms is the director of marketing for SAP ERP Financials, and resides in the Bay Area with his wife, young son, and a fish he is constantly replacing.