Beware when you hear the the phrase – cash is a little tight right now

Guest post by Philip Campbell

In my recent post, Your CFO to the rescue: Solving the mystery of cash flow – Part 9, I talked about the importance of avoiding the accounts payable trap.

In this post, I’ll show you an example that helps highlight how that trap can snare you if you are not careful.

In my book Never Run Out of Cash, I devoted chapter 8 to a real life example I experienced in a company I had come in to help.

The president of the company had some concerns about cash flow.

He thought the process for collecting receivables from his customers was not functioning as well as it could. Money was tight and he believed the primary reason was a slow-down in collecting receivables from his customers.

One of the first things I did was spend some time in the accounting department, which, as the keepers of the accounting records, is where one should be able to find the answers to the questions.

And find the answers I did!

Cash is a “Little Tight”

The first thing I found was that cash wasn’t just “a little tight right now.”

The dollar amount of vendor invoices in the system to be paid (accounts payable) was three times more than the cash available to pay the invoices.

More than half of the invoices were already past due.

The next issue was that not all the invoices had been entered in the accounting system.

There were fairly recent invoices that were sitting in a stack to be entered later. The accounting department personnel were in no rush to enter the invoices because they knew they would not be able to pay them anytime soon.

The reports that had been printed to show the cash balance and the accounts payable balance (bills to be paid from the cash balance) did not even show these bills.

These invoices went into a stack I call the “these will be entered closer to when they can actually be paid” stack.

I have seen this happen in many companies that have cash flow problems.

Accounting is forced to delay payment on some invoices and not pay others at all. Vendors then start calling to demand their money.

The vendor’s favorite question is, “When will I get paid?” After several calls, they start to sense that the company is in trouble. Then they get upset and rude with the person on the phone. That’s when it gets ugly—and a bit personal.

It’s hard for the clerk in accounting to take the heat from a vendor who feels like he is being cheated by the company. The vendor provided a product or service to the company and he wants his money when it was promised. The vicious cycle continues.

Accounting is now spending much more of its time fending off vendor calls. Another chunk of time is spent fending off people inside the company who are also irritated because vendors are starting to call them and threatening to cut off products or services.

The CFO to the Rescue

As the CFO, you have to jump in and manage this whole process strategically.

You have to be in front of the CEO every day with the facts about how vendor invoices are being managed.

One strategy I have used very effectively over the years is to measure the number of days of expenses sitting in accounts payable (DPO).

I include this number in my dashboards and reporting to the CEO so it is crystal clear how the strategy is impacting vendors. I do that long before the vendor complaints and hell-raising happen because it is all very predictable when you are monitoring the age of your payables every day.

Here is an example of a graphical cash flow dashboard so you can see how I implemented this. The second dashboard has the DPO metric in it.

Cash Flow Projections Provide Visibility

Another thing I do is include in my monthly cash flow projections the amount of cash needed to bring accounts payable back down to normal levels.

This helps management and owners see the impact on cash when we start paying vendors based on our normal terms. I want everyone to clearly see what it takes to get back on track.

It’s a great way to keep the number front and center for everyone to see and understand.