In a remarkable announcement covered by the FT, Mondelez International, the former Kraft snack food group, is changing its payment terms to 120 days. Wow, there’s some real arrogance right there. Cash hoarding by large groups has caused the percentage of cash relative to total assets in their balance sheets to be at the highest level in history. Great for them but what about the 99% of companies that aren’t large public companies?
To put this into context for a smaller company (relative to large public groups), let’s say you have revenues of $36.5m or $100,000 per day. Let’s assume your cost of borrowing is 5%. By allowing your accounts receivable to slip just one day, costs you $5000 per year. That’s right off the bottom line. Imagine a big company moves you from 30 days net to 60 days! That’s an annual cost of $150,000 right off the bottom line.
So you really need to watch your cash ratios very carefully! – Some further thoughts on cash protection:
- Review every procedure connected to cash generation. Queries hold up cash. For example, a $100k invoice with a $20k query is holding up $80k needlessly. Don’t let it happen.
- Design efficient query resolution systems. Use calendars or diaries relentlessly to document cash promises made by customers.
- Incentivize your credit control department with bonuses but set the ground rules for chasing!
- Move to an online payment system. Look for more stage payments.
- Build payment terms into sales negotiations. Ensure commission structures reflect cash received.
- Build sales teams into credit control strategies.
- All essential CAPEX should be leased to conserve cash.
- Understand your outstanding days payable and graph all trends.
- Monitor cash generation % = Increase in monthly bank balance divided by monthly profit (In any business where cash is paid up front, this ratio can be greater than 100%). As always with ratios, trends are key.
- Build the most robust cash flow forecast possible by building a formal sales pipeline with weighted percentages, factoring in the real accounts receivable days and accounts payable days and being conservative on overheads.
Metrics implementation around all balance sheet ratios is key. Check out our Metrics Implementation Service offering here.