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The art of managing cash in a recession
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Generating cash in any market cycle is important for any business, but in a recession, it’s the be all and end all for a company’s survival. That’s why private equity managers should engage with their portfolio companies to improve the cash generation of receivables. Joe Considine, turnaround specialist, sets out a number of practical actions your portfolio companies can take to improve their cash intake.
Step One: Create an efficient collections process
- Measure the efficiency of the collections process by the percentage of the ledger which is outside terms and overdue. Your primary focus should be on the accounts that have an overdue element. Prioritise by using the 80/20 rule to segment the ledger and focus collectors’ time upon the higher value overdue accounts thereby achieving the greatest improvement quickly.
Step Two: Improve Targets
- The next step is to allocate accounts to collectors to establish individual accountability for the improvement targets. Focus collectors on collecting and, where possible, reallocate other activities. Another important task is to calculate ‘days sales outstanding’ (DSO) and set reduction targets significantly to reduce the overdue percentage in the ledger.
Step Three: Peer pressure with a purpose
- It doesn’t hurt to put in an element of peer pressure by using flip charts visibly to record the daily progress of future and current monthly DSO targets and the associated monthly cash collection targets. All of these should be predetermined and on view for each member of the collections team.
- Make sure the collections area is buzzing with phone conversations to major accounts and not a reactive pool of letter writers. Collections staff should look at collections pro-actively rather than a reactive ‘dunning letter’ process. Call major accounts before the due date to get cash pledges and provide time to resolve disputes. It may be wise to even outsource the collection of accounts below a certain debt level.
- Plus, contact with customers on a regular basis will enable a better understanding of the causes of overdue accounts. Maintaining a customer call log, which records the reasons for non-payment and the means of settling disputes, will also be helpful.
Step Four: Dispute feedback
- From the call logs, your team can develop a dispute feedback loop. This enables collections to discuss what is being said at weekly meetings and to highlight systemic operational issues that need to be fixed and administrative errors, which give rise to non-payment, and the issue of credit notes. This should assist clean deliveries and invoicing and will improve competitiveness by increasing the OTIF (on-time and in-full).
Other tips:
- To increase cash receivables make an active effort to seek direct payment transfers and consider early settlement discounts.
- Throughout the year and especially now, customer credit periods should be reviewed so that a company can ascertain whether there are reduction opportunities. Does the credit period commence with the day the invoice is raised or the end of the month in which it is raised? Just make sure you avoid the latter scenario.
 Joe Considine of Considine Associates can be contacted on 07710 397569 or jpc@callp.co.uk
Considine Associates was founded by Joe Considine after 20 years as a partner at PricewaterhouseCoopers whose turnaround methodology he invented. His firm brings together a multi-disciplined team with a wealth of turnaround know-how and experience. Considine Associates works with stakeholders and management, providing leadership, advice and executive support, as appropriate, to realise the potential of underperforming and troubled businesses. Visit www.callp.co.uk for more information. |
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