The CEO Project has conducted research that suggests that critical to success is selecting the right business and profit model.
An essential part of any successful business model is determining how to maximize cash flow, minimizing risks and balancing the needs of specific clients. The cash flow component of the business model has to be built around the simple concept of “what works best for the company” and not “what works best for the client.”
While managing cash flow and receivables may not seem like the something that fits into the job description of a CEO, it is. Kraig Kramers, while leading Snapper, the lawn care company, required a daily cash report at the start of each day for two reasons. First, he wanted to send a message to every employee that he was watching cash flow and he understood that if he was paying attention to it daily, so would his employees. Second, he understood that cash flow management was so critical to business survival and success that it was truly a CEO level responsibility that could not be relegated, delegated or ignored.
It is the job of the CEO to reduce risk whenever possible, and it begins with the creation and implementation of successful credit/collections policies and procedures.
Many companies believe that what is normal and customary for their industry must be adhered to when it comes to invoicing and collections; otherwise clients will take their business elsewhere. This is simply not true. Failure to pay invoices timely is not a smart business practice; it is the sign of a company that is not well managed. Who wants clients that don’t pay their bills? Who wants to do business with a poorly managed company?
The CEO of every organization needs to be open minded about the various methods and means to more bring cash into the company from clients because it will not only reduce financial risk but will also improve the valuation of the company. The management and improvement of cash flow cannot be after thought; it cannot be done only when a crisis looms.
The most desirable of all cash flow models is that the client pays the total invoice, in advance, before the company incurs time, materials, production and other costs. When this is done, the risk of the client not paying, or delaying payment, is virtually eliminated.
Getting a deposit or retainer in advance is also a good way to reduce risk, but unless the company is clear in communicating to clients when the remaining payment(s) are due and there are consequences of not meeting those deadlines, the company is relying on the goodwill of the client to pay.
Risk occurs when the company has no set policies or procedures regarding credit or collections. Substantially more risk occurs when there are policies and procedures in place and they are not executed.
Key components of reducing risk include determining credit worthiness of clients and assigning credit limits to each one. Credit insurance is available at a relatively low cost to mitigate risk of default or short payments.
But the most important aspect of reducing risk and increasing cash flow is a proactive and systematic approach to collections. This means monitoring credit worthiness of clients on an ongoing basis because the circumstances of clients change. It means educating clients of the company’s policies related to credit and collections. New clients (and perhaps those with changing credit worthiness) need to be called when an invoice is mailed, called again to make sure the invoice has been received and to determine the date that the invoice will be paid. It means following up before the due date of an invoice to make sure that the client intends to pay it when it is due and not later.
Intelligent cash flow management does not mean sending “past due” notices and hoping that the client will pay it immediately. When previous “past due” notices have been ignored, it does not mean sending more notices. It does not mean calling and leaving a message about a past due invoice and hoping that the call will be returned. It means assigning a competent individual or individuals to the critical tasks of credit and collections.
The CEO needs to take an active role in ensuring that the cash flow of the company is protected and positive. This may mean changing the business model; it may mean finding better clients, and moving away from clients that cannot pay their bills within set deadlines. It may mean that company will need to address gaps in policy and in execution. Poor cash flow happens because of poor design, lack of policies, lack of communication with clients and poor or non-exist execution by staff.
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