19,99 €
Mehr erfahren.
- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
An illuminating exploration of the importance of your company's cash position and the steps you can take to ensure organizational liquidity
In Cash is King, working capital and cash strategist Peter W. Kingma delivers an insightful and practical discussion of why your company's cash position should be on an equal footing with sales, cost, and service, and how to make that happen. You'll learn why cash is the fuel in your corporate engine and discover the attributes of an organizational cash culture and how to adopt them within your own firm.
While explaining some of the most important—and most misunderstood—corporate finance concepts, this book is not a finance textbook. Instead, it uses case study examples to offer concrete suggestions for improvements in your company that increase the availability of cash when you most need it. You'll also find:
- Discussions of the importance of sufficient liquidity for operational concerns, research and development, and capital improvements
- Explorations of the consequences of insufficient cash positions
- Examinations of the ripple effects of seemingly small decisions that affect cash supply
An essential resource for managers, executives, and business leaders everywhere, Cash is King is an effective and hands-on exploration of cash as the lifeblood of any modern commercial entity and an incisive guide to ensuring that your company will have enough of it when its required.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 273
Veröffentlichungsjahr: 2024
Ähnliche
Table of Contents
Cover
Table of Contents
Title Page
Copyright
Dedication
Introduction
CHAPTER 1: Order‐to‐Cash
Sales and Customer Management
Credit and Risk Management
Ordering and Invoicing
Collections and Dispute Management
Payment Management
Summary
CHAPTER 2: Procure‐to‐Pay
Sourcing Strategy
Supplier and Contract Management
Goods Receipt and Payment Management
Summary
CHAPTER 3: Forecast to Fulfill
Procurement
Sales
Marketing/Engineering
Logistics/Warehousing
Finance
Production
Summary
CHAPTER 4: Logistics
Packaging and Delivering Products to Customers
Logistics Considerations
Summary
CHAPTER 5: Production
Inventory Material in a Plant
Materials Management
Turning the Purple Cow Around
Summary
CHAPTER 6: Controller
Absorption
Weighted Average Cost of Capital
Gross Versus Net Working Capital
Cash Forecasting
Summary
CHAPTER 7: Metrics
Types of Metrics
Aligning on the Metrics
Metrics Terminology
Evaluating the Metrics
Summary
CHAPTER 8: Resiliency
The Day Grant Became Bob's Mentor
Business Is a Live Production: There Are No Do‐Overs
Summary
CHAPTER 9: Cash Leadership Office (CLO)
Developing a Cash Culture
Sunsetting CLO
Establishing the CLO
Different Ways to Burn the Ships in the Harbor
Summary
CHAPTER 10: Nonmanufacturing Examples
Cash Management in Various Industries
Summary
Acknowledgments
About the Author
Index
End User License Agreement
Guide
Cover
Table of Contents
Title Page
Copyright
Dedication
Introduction
Begin Reading
Acknowledgments
About the Author
Index
End User License Agreement
Pages
iii
iv
v
ix
x
xi
xii
xiii
xiv
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
173
175
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
CASH IS KING
MAINTAIN LIQUIDITY, BUILD CAPITAL, AND PREPARE YOUR BUSINESS FOR EVERY OPPORTUNITY
PETER W. KINGMA
Copyright © 2024 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per‐copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750‐8400, fax (978) 750‐4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748‐6011, fax (201) 748‐6008, or online at http://www.wiley.com/go/permission.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762‐2974, outside the United States at (317) 572‐3993 or fax (317) 572‐4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our web site at www.wiley.com.
Library of Congress Cataloging‐in‐Publication Data:
Names: Kingma, Peter W., author.Title: Cash is king : maintain liquidity, build capital, and prepare your business for every opportunity / Peter W. Kingma.Description: Hoboken, New Jersey : Wiley, [2024] | Includes index.Identifiers: LCCN 2024001116 (print) | LCCN 2024001117 (ebook) | ISBN 9781119983354 (cloth) | ISBN 9781119983378 (adobe pdf) | ISBN 9781119983361 (epub)Subjects: LCSH: Liquidity (Economics) | Cash management.Classification: LCC HG178 .K56 2024 (print) | LCC HG178 (ebook) | DDC 658.15/5—dc23/eng/20240214LC record available at https://lccn.loc.gov/2024001116LC ebook record available at https://lccn.loc.gov/2024001117
COVER DESIGN: PAUL MCCARTHY
Dedicated to the memory of my parents, Gordon and Barbara Kingma, and to my partner in life, Thom Lambert.
Introduction
Smartly dressed in a blue suit, white shirt, and a pocket square, matching his brilliant red tie, Lee Iacocca strode confidently into a House committee room to formally ask Congress for a bailout of the Chrysler Corporation. It was September 1979, and Iacocca, the newly installed chairman of Chrysler, was nearly as famous as the company he had started leading.
Chrysler was the 10th largest company in the United States, but the third of the big three automakers. It had a storied past filled with great innovations in engineering and design such as antilock brakes, key‐start ignition, cruise control, and, perhaps most important, cup holders. But the 1960s and 1970s were hard on Chrysler. Attempts to expand globally coupled with several product failures left Chrysler very vulnerable going into the 1980s. The company did not have a balance sheet strong enough to weather three recessions, two oil crises, new environmental regulations, and soaring inflation. Chrysler simply did not have enough cash.
The seemingly simple concept of managing positive cash flow, on the balance sheet, trips up so many businesses. You must have enough cash on hand to pay your bills, invest in research, develop new products, build efficient plants and so on. Those with strong balance sheets are resilient and can take advantage of growth opportunities. Those who are too leveraged—too much debt and too little cash—are vulnerable any time the economy shifts. Despite its illustrious history, Chrysler could not keep up and needed a lifeline from the government.
There are many factors that go into making a business successful. Having products people want to buy, beating competition on price, and employing a talented and efficient labor force are critical. And there are often factors out of management's control. Inflation, increasing interest rates, supply chain disruptions, and geopolitical crises can make or break many businesses. As I write this book in 2023, the global economy has suffered one shock after another beyond any one company's control.
The COVID‐19 pandemic has altered permanently how businesses operate. It laid bare the simple fact that the global supply chain is highly entangled. In 2020, consumer preferences shifted overnight, and even strong, resilient companies scrambled to keep up. This story continues to play out, and I'd argue that the norm for the next five‐plus years is one of rapidly shifting supply‐and‐demand dynamics. Even things like our collective approach to global warming will create a high degree of volatility.
There are many things businesses must do to meet these challenges, but one factor is, without question, absolutely critical. Companies must have access to cash to address volatility.
I coauthored a study at Ernst & Young in 2022 that demonstrates a strong correlation between effective cash management and resiliency. We reviewed 5,000 global companies and evaluated how well they manage working capital. The upper half of those companies are 20+% more effective at limiting the initial shocks of market downturns. Further, weaker performing peers in the bottom half spend on average 26% more time after economic downturns lagging peers in terms of shareholder return. It takes cash to address market shocks.
When global supply chains collapsed at the onset of the pandemic, companies scrambled to adjust, investing heavily to secure materials and paying far more for logistics. Some used debt to fund their capital requirements. This worked as long as interest rates were low and the cost of debt was cheap. But, as the economy heated up and inflationary concerns were addressed through rising interest rates, the debt strategy became unsustainable. Organizations that entered this period with effective cash management discipline not only were better able to respond to market shocks but also they used their strong balance sheets to win market share from weaker rivals.
The market is never constant. There are always ups and downs. Smart leaders recognize this and are focused on cash management at all times. I describe this as having a cash culture. A company with a cash culture understands it is not just about revenue growth but also about cash generation. This is not as easy as it sounds.
Most businesses are built on a profit‐and‐loss (P&L) culture where sales rule. But things can get out of control very fast. For example, salespeople can agree to all sorts of terms and conditions. You won a big deal but can't get paid for 120 days. Purchasing can chase the lowest cost for material but in doing so agree to large quantities with long lead times. Manufacturing can operate plants most efficiently through long run cycles—running equipment at capacity—but your investment in inventory balloons. There are many examples of trade‐offs management needs to make to keep equilibrium between the P&L and the balance sheet. Unfortunately, many of the decision rights for those trade‐offs are scattered about the organization and are being made by individuals without insight into downstream effects.
Companies that truly have a cash culture ensure that people have the right tools and training to make good decisions. They promote processes and policies that improve cash generation. And they align incentives and metrics to ensure compliance and sustainability.
Trade working capital accounts for the biggest component of operational cash flow. What is trade working capital? Simply put, it's current assets and current liabilities that are directly associated with operations. Current assets include inventory and accounts receivable, and current liabilities include accounts payable. A business buys materials, investing in inventory and creating products. The products are then sold to customers, and the amounts customers owe are referred to as accounts receivable. Conversely, the company will need to pay suppliers for the materials they buy, which is called accounts payable. Timing is at the heart of effective working capital management.
I'd like to align what I owe my suppliers with how I get paid from my customers and hope to hold only the inventory that I can quickly sell. The more inventory I start to hold, the more cash I tie up in my business. The longer it takes my customers to pay me, again, the more cash I tie up. And, if I must pay my vendors quickly for the materials I buy, I am making big cash outlays often in advance of when my customers will pay me. Let's say that my customers take four months to pay me and that it will take me six months to sell off all the inventory I bought, but the guys I owe money to are knocking on the door and they want to get paid … now. Depending on who these guys are, I might be in a real jam. The timing of when I must pay for stuff and when I get paid for my products or services is what makes or breaks my cash flow.
Okay. It's super‐easy. Pay people slower, don't hold on to more inventory than I need, and get people to pay me faster. End of story—no need for this book!
Perhaps I'm a self‐interested author, but it's not that easy. Businesses are complex entities. Markets are constantly changing. Decisions that make sense one day might be disturbing the next day. And, as I said, there is often a bias to chasing sales growth without much attention to that pesky art of timing.
This book is not a textbook.
Rest assured, there will be no fancy graphs or complicated equations. Instead, we'll look at what really drives cash through the lens of a fictious company, Owens Electrical. We'll meet the president, Bob, as well as run‐of‐the‐mill employees who deal with everyday, real‐life decisions. Sometimes they make good decisions, other times not so good. Through this story I hope that you come away with an appreciation for the importance of effectively managing working capital and operating cash flow.
In Chapter 1, we will look at how Owens is managing the money people owe them. This will be referred to as order‐to‐cash (OTC). These are the steps taken from the time an order is received through to getting the cash in hand. It includes activities such as order entry, billing, and collections. But, because things rarely go as planned, our team at Owens will need to straighten out mistakes they make that cause their customers to hold back payments.
Next, in Chapter 2, we will focus on how Owens is buying things from others. This is called procure‐to‐pay (PTP). It turns out there will be a lot of room for improvement from our team at Owens on this front. Then we start to look at where the big bucks are: inventory.
Inventory management is complicated and trips up even the best companies. You can earn bachelor's degrees, master's degrees, and PhDs studying this topic. Chapters 3 through 6 examine some drivers and best practices. Fear not, we'll keep it at a high‐enough level to explore the concepts without (I hope) putting you to sleep.
Once we've covered the basics of working capital management, we will then consider what we should measure. I'll say it here and then again in Chapter 7: “What's measured improves.” Another, far more famous Peter wrote that—Mr. Peter Drucker. I agree completely. But metrics can be tricky. If we measure too few things, we might not get the outcomes we desire. But, if we overload the organization with too many metrics, we might confuse everyone and get similarly dismal outcomes. The key is to pick the right things to measure and to assign them to people who have direct impact. That's what we will look at in that chapter.
I said previously that I have empirical evidence that cash really is king and that companies with healthy cash flow are more resilient than their peers that don't have as strong a balance sheet. In Chapter 8, our friends at Owens will illustrate this point. Bob, the president of Owens, will then conclude that the business needs to truly transform and address all the issues covered in the first eight chapters. In Chapter 9, he will establish a cash leadership office. This will be the foundation to building and sustaining a true cash culture.
Last, before I let you go, in Chapter 10, we will look at how all of this applies to nonmanufacturing companies. Owens (our fictitious company) is a traditional manufacturer that mostly sells business‐to‐business. Although certainly not exhaustive, we'll consider other types of organizations and how these management principles apply.
So, who is this book for?
My hope is that anyone who is interested in management will find this book an interesting read. There is much written about sales, marketing, leadership, and even efficient operations. Aside from textbooks, there are few books that explain working capital and cash. So, this book is for middle managers who aspire to senior leadership, executives and directors who want to help their organizations understand the importance of cash, and investors who would like to better understand what makes a company truly healthy.
Frankly, it's for anyone interested in business.
CHAPTER 1Order‐to‐Cash
Meet Bob. Bob runs a mid‐size company, Owens Inc., that makes and sells electrical equipment. Bob joined Owens out of grad school and worked his way up from junior engineer to CEO. The company grew and evolved and in the past five years it has really taken off.
When he started, Bob knew just about everyone at Owens and prided himself on understanding most aspects of the business. But as president, he recognizes that Owens has become very complex, and he no longer has the same grasp on things he once had. Recently, a young man, Juan, introduced himself to Bob while in line in the company canteen. Bob saw his younger self in Juan and was impressed, thinking it was smart of Juan to strike up a conversation with the company president.
“What department are you in?” Juan then asked, bursting Bob's bubble. He had no idea who Bob was.
“So that is now how it is,” Bob thought to himself. “This place has become so big that the president goes unrecognized in his own offices.”
Growth at Owens, like most companies, has not always been smooth sailing. There was a time when the company almost lost its most important customer over quality problems. Then there was a sort of “bet the business” that Bob boldly made when he first became president. Bob plunged the company into new products and new markets, not knowing if the once sleepy business could keep up. These were trying periods for certain, but for the most part the company grew and grew. And as it did, leaders like Bob started to get complacent. The memories of what it took to keep a small business afloat, like the times of uncertainty about being able to make payroll in each month, had faded. The excitement of growth took hold.
There were ribbon‐cutting ceremonies all over the country. Local officials courted Bob and praised his leadership. Investors loved the results, and it became quite intoxicating. Bob would hold operations reviews and started each meeting with graphs showing sales projections, challenging his team to keep the focus on growth. “The customer always comes first at Owens!” Bob would frequently extort. But what he meant by that was “sales to customers always comes first.” There is a big difference.
Quarter after quarter, sales were growing, and Owens was taking market share. The future looked very bright, and Bob felt unstoppable. That is until Carol, the chief financial officer (CFO) of Owens, started to raise concerns about cash flow. She was concerned because interest rates were increasing, the complexity of their business was growing and the demand for capital improvements was at an all‐time high. Inventory was growing faster than sales and although Bob did acknowledge some concern about that during operations meetings, it wasn't enough to tap on the brakes of growth. There was another big problem that had Carol very concerned. This one was really affecting her ability to forecast cash and to fund all the expensive capital initiatives Bob had launched. Customers were paying much slower than they had in the past.
Over the last three years their DSO (days sales outstanding) had increased from about 45 days to more than 65 days. That means it now takes Owens 20 more days—on average—to collect money from its customers. When Carol first started to tell Bob of the steady growth in DSO, he didn't seem all that alarmed. “We will get the money eventually—right? It's just a part of growing the business, Carol,” Bob said rather dismissively.
Carol saw it quite differently. It was a warning siren. There was a time when her boss would have understood this. Years ago, Bob lost the chance to make a strategic investment because Owens's balance sheet was not healthy enough. He fumed and promised to not forget that valuable lesson. “Cash is king, Carol!” He would say, as if he needed to remind her. But managing cash is not always glamorous. It's not like sales. Sales are exciting. Winning a big contract, entering new markets—that's what gets called out and celebrated. Collecting a bill on time is boring. Like most business leaders, Bob delegated those tasks and focused his energy and attention on revenue.
They worked together for years and were quite close, but there was no mistaking who the boss was at Owens. And as the company—and by proxy Bob—became more successful, his leadership team often told Bob what he wanted to hear. Even the board of directors at Owens seldom challenged Bob. So, getting her boss to focus on the seemingly mundane topic of cash was going to take a deft approach. Carol would need to ease into it. Bob was an engineer by training so she would get him stimulated by the thought of solving complex problems. Just going up to Bob and asking him to talk about accounts receivable would be a non‐starter. He was consumed lately with new product launches and expanding into Asia.
“You fix it!” She anticipated Bob would tell her. “Cash is a finance problem, and you are the CFO,” he would remind her. But Carol knew differently. She knew that at the rate Owens was growing and with inventory piling up and customer collections taking much longer, this required executive leadership focus. “Cash really is king,” she would need to remind her boss, but she'd certainly need to do that in a tactful, diplomatic way.
“Bob, we've become a bank,” Carol blurted out during their weekly meeting. “And not a very good bank at that.” So much for the tactful, ease‐into it approach. Carol pulled out the pin and tossed the grenade.
“What are you talking about Carol? A bank?” Bob shrugged.
“Most of our customers have payment terms between 30 and 40 days. They are obligated to pay within that range after they receive the equipment. But, on average, they now pay us about 65 days after delivery. That means we are allowing them to hold onto our money an additional 25 to 35 days. We are sort of floating them loans. Oh, and the best part? There is no interest charge. We don't charge them anything additional for this float. We have become a not‐for‐profit bank, Bob.”
A frown came across his face. “Well, why don't you get on the phone and call these guys and get this straightened out,” Bob said sternly. Carol then explained that she had been in touch with many of the customers she personally knew, and they painted a different picture. A few sheepishly admitted that they were having cash issues and were delaying payments, but most explained that Owens either accepted new commercial terms or caused the delay because of billing problems. The 20 days increase in DSO—the time it takes to collect money—was self‐inflicted.
“Bob, this is not a finance problem. It's an operations problem. We want to keep growing, but it takes capital to fund that growth. I don't know how to delicately says this, Bob, but we've taken our eye off the ball.” This got a rise out of Bob. He prided himself on knowing the details of his business. Now his CFO was telling him that he was not focused on the right things? But to his credit, he allowed a decent pause before he responded.
“We go back a long way, Carol. I remember the nights we'd order pizzas and each of us would work the phones trying to chase down past due bills. It was sort of fun—those days. We had a vision. We were going to build something special. And we did. And over the years we've hired a small army of folks to manage billing and collections. We hardly took our eyes off the ball, Carol.”
She knew that despite his calm tone, Bob was irritated. She was calling him out and it had been quite some time since anyone had done that so openly. “We could hire twice as many of those people, Bob, and I don't think we would achieve better results,” she said carefully. “Look, what I'm trying to call attention to is that we have process breakdowns as a result of our rapid growth. Just like we've had to reconfigure our plants to accommodate growth, we need to update our business processes. This is what you do best, Bob. We need the engineer in you to help eliminate defects.” Now she was luring him in. She knew that Bob loved to solve complex problems.
Carol walked over to the whiteboard and wrote the following:
Sales and customer management
Credit and risk management
Ordering and invoicing
Collections and dispute management
Payment management
“Pour yourself another cup of coffee, Bob. I'm going to give you a crash course on something called order‐to‐cash or OTC for short. OTC are the steps from when you set up a customer, take an order, create an invoice, attempt to collect the money, and finally receive the cash in the bank. At each of these steps there are—frankly—opportunities to get it right or to screw it up. We've been screwing up with some of these things and that is why we are …”
Bob cut her off. “Don't say a bank!”
“Okay, Bob, then let's just say, that's how we have become … more generous. Twenty‐plus days more generous. And growing.” Carol amused herself at how quickly she felt comfortable ribbing her boss.
In the next few sections, let's look at each of these steps in the OTC process and consider some points of failure as well as best practices.
Sales and Customer Management
If you want your customers to pay you more quickly—or even just to pay you on‐time based on your agreement, you need to start at the beginning. A sales team hungry to close deals often has a lot of discretion and can enter all sorts of arrangements on behalf of the company. Pricing and profit margins are almost always closely watched by management, but many seemingly little decisions made by the sales team can greatly affect financial performance downstream and often go unnoticed. This matters because each little decision adds up and further delays the collection of cash. Yet, employees still need to be paid, and the rent is still due. Materials must continue to be purchased, and any plans for expansion or equipment repairs will be affected by the decreasing cash flow.
Start by recognizing that not all customers are equal. Some cost far more to serve than others, not only because of the discounts they negotiate but also because of commercial terms requirements. Segmenting your customer base, you might discover the Pareto principle applies. That is, 80% of your sales are quite possibly generated by 20% of your customers. Do we want to offer all sorts of one‐off accommodations to the 80% of customers that likely only generate 20% of sales? Being clear about this and frequently reviewing with your sales team costs to serve customers is key to ensuring they make informed decisions.
Customer ABC wants to award Owens Inc. a big deal, but instead of 45‐day payment terms, they are asking for 90‐day terms. Take the deal? Push back? It's hard to say without additional detail. Is the margin great enough to offset the carrying cost of an additional 45‐day float? ABC is a public company, so we can see that their days payable outstanding is 37 days. On average, ABC is paying their suppliers in 37 days. And they now want to pay us in 90 days? Is this order strategic enough to justify that? Owens also buys from ABC and pays them in 45 days. So now the balance of trade will be off by 45 days? These are real‐life, everyday considerations that many organizations gloss over. Winning a big order can be a highly charged event. It's exciting. We don't want to walk away, but do we have support processes in place to help the sales team make good decisions? Do we use segmentation of our customer base to better understand our bargaining positions? If we want to move to a cash culture, we must have well‐developed processes and policies in place to guide these decisions.
We also need to train and incentivize our sales teams. Far too often, commissions for sales teams are paid based on the order versus based on the collected revenue. Linking these payments to cash received helps motivate the sales team to get the best price and margin as well as terms that are cash positive. At a minimum, one should have commission/bonus claw‐back provisions for seriously late paying or deadbeat customers. We want sales teams to be incentivized to optimize their compensation, generating revenue for the firm. We also want to be sure that revenue converts to cash as quickly as possible.
Sales and Customer Management Best Practices
Some best practices to consider:
Implement a customer segmentation strategy that includes total cost to serve. This should be an ongoing process, not just a one‐time activity. Understanding all the requirements to serve a customer will be helpful in making informed decisions.
When reviewing pricing and margin on deals, be sure to include the impact of customer terms. In the previous example, the customer wants another 45 days to pay. At a minimum, we'd want to be sure we cover our weighted average cost of capital—in additional margin—for those additional 45 days. If we still want the deal, we need to factor the cash impact into overall financials.
Link sales compensation to collected cash versus sales orders. Incentivize the sales team to drive deals that support a cash culture.
In summary, no matter how skilled the downstream billing and collections teams have become, ability to quickly collect cash starts with up‐front sales and customer management. Linking cash performance to revenue and profit is essential.
Credit and Risk Management
In the previous section, we discussed how to approach customer segmentation and why that helps get a perspective on cost to serve. In this section, I'm going to make an argument for treating everyone alike by applying the same credit review standards to all customers. Many businesses get into trouble by overextending credit to big customers or allowing basic risk management practices to wane because of friendly, long‐term relationships. Credit and risk decisions should be carefully guarded, and deviations should be managed by the most senior officers such as the CFO.
It is common to perform credit reviews for new customers, but far too often businesses fail to perform basic ongoing reviews. For example, a customer that always paid on time is now increasingly paying late. Does that trip any sort of alarm? Or in the case of a chronically late‐paying customer, do you review your overall exposure? Do you continue to provide services or sell products?
