Controlling Cash During a Turnaround
- What is the current cash position of the company?
- How does the company's cash management system work?
- What reports are in place to track daily cash inflows and outflows?
- What are the cash needs of the company during the turnaround?
Once these questions have been answered in detail, changes to the cash management system can be developed and implemented to better manage cash and effect change. Simultaneously, there must be a focus on actively managing three important working capital accounts: accounts receivable, accounts payable and inventory. Effective and timely management of the company's cash resources can stave off shortfalls and ensure a successful turnaround.
Answering the Questions
What is the current cash position of the company? A listing of all cash funds by account is created, including the location of the funds, how funds can be used and what restrictions are placed on each account. This will give management a snapshot of the funds available for use at the start of the turnaround.
How does the company's cash management system work? The first step to understanding the cash management system of any company is to create a flowchart detailing the cash management system. An example of this type of flowchart is shown in Exhibit 1. This flowchart should explain the method and timing for depositing cash and disbursing funds. There should be further explanation of cash disbursement controls, spending authorization, check-signing authorization and the frequency for releasing payments. This information will allow management to consolidate and close unnecessary accounts, reduce the number of persons authorized to sign checks and determine the proper controls necessary to manage cash during the turnaround.
What reports are in place to track daily cash inflows and outflows? The company should have daily reports for tracking and managing funds. In order to manage funds effectively, these reports should be inspected for accuracy and timeliness of information. Items to include in these daily reports are billings by business segment, collections by business segment, expenses incurred, checks outstanding and checks held, uncollected deposits, cash-related operating expenses, vouchers due and remaining borrowing base availability. These reports allow management to make informed decisions on how to allocate available funds. There also should be a documented set of procedures for releasing checks and designating those persons with the authority to do so. Management of cash inflows and outflows during a turnaround is critical. One mistake could stop the company in its tracks.
What are the cash needs of the company during the turnaround? Preparation of a daily cash budget for the first 30 days of a turnaround will aid in determining the nature of the cash crisis. Also, a rolling 13-week cash budget should be prepared in conjunction with a monthly cash budget for the next nine months. This will provide a tool for managing through the turnaround period. Additionally, needs may arise to fund an important capital improvement project or to negotiate an increase in advance rates during the holiday season. All these items must be planned in advance so management is not caught off-guard during the turnaround.
Managing Critical Working Capital Accounts
Accounts Receivable. The key to managing accounts receivable during a turnaround is to find new ways to speed up the collection of funds. First, management must understand the current customer base. What are their needs and wants? Also, an aging of receivables and the location of collections are important information. This will give management ideas of how to consolidate collection and billing to streamline the company's processes. The next step is to identify major customers with large outstanding balances. By assessing these accounts, a determination may be made as to how these accounts may be collected. Also, a review of collection efforts made in the past and the outcome of these efforts will provide added insight into collection strategies. Some effective strategies for collection of other accounts might be determined from this review. Two strategic examples are discounts for early payment and setting up special teams for collecting late accounts with possible incentives for collection. These strategies provide ways to proactively manage the collection of accounts receivable during a turnaround.
Accounts Payable. Management of accounts payable during a turnaround depends on the level of the cash crisis. In the most severe cases, where important vendors are putting the company on credit hold or c.o.d., an emergency plan of action needs to be implemented to stabilize the business. A list of critical vendors should be prepared to identify the impact each vendor has on the business. This list should include the aging of each payable, the goods or services provided by the vendor, the concentration of business that vendor represents and the status of that vendor (e.g., shipping, credit hold, c.o.d.). Alternative purchasing sources should be listed for each of the most critical vendors. A daily forecast of vouchers coming due for the next 30 days should be prepared to understand when large payments are due by vendors. One way to manage payables is to pay only the vendors deemed most critical and subtly accumulate payables on non-critical vendors. The list of alternative purchasing sources can be used to establish new channels for the procurement of goods and services. If there are any debit balances mixed within the accounts payable aging, collection attempts should be initiated. Once the emergency has been stabilized, new terms should be negotiated with vendors that have put the company on c.o.d. Also, the purchasing and disbursement cycle should be reviewed for ways to extend terms. These terms may be compared to industry-specific standards. All these items help to extend the credit of the company during the turnaround.
Inventory. Inventory management during a turnaround begins by touring the company's plant or warehouse to understand the inventory composition. Inventory that appears to be old should be questioned for possible liquidation. Next, a listing of slow-moving inventory is identified. Potential buyers of this inventory are created along with a market valuation to determine the potential cash value. After addressing slow-moving inventory, a detailed analysis of the inputs, purchases, outputs and sales should be created. This will help to identify any items that can be scaled back due to over-supply, and thus increase cash flow. Also, any large purchase order commitments should be reviewed for possible cancellation depending on the amount of the negotiated penalties associated with a cancellation. Another area to pursue is out-of-stock items. These items should be scrutinized and adjusted to maximize sales potential. These actions will help to manage inventory and maximize cash flow during the turnaround.
In conclusion, cash management is critical to the success of a restructuring. Identifying and improving cash management systems, creating an accurate method of forecasting cash needs and effective management of working capital will buy the turnaround manager time to assess and re-evaluate the company's long-term strategic plans. By managing cash effectively, the turnaround manager will help to free up cash to fund the company's strategic initiatives.