CFO World recently published a short piece on ending the dash for cash in which they outlined then steps to success that an organization can take to help shrink working capital in which they got it all wrong.
Good working capital management doesn’t shrink working capital, it enlarges it. So, in the spirit of Mark Perera’s Nine Rules for Stifling Supplier Innovation, Sourcing Innovation gives you nine rules for insuring that you will eventually have to dash for cash to keep your business afloat.
- Focus on recently overdue accounts. If the customer has a history of paying on time, but just missed a payment or two, even though chances are they just screwed up because they haven’t implemented proper e-Invoice Management and temporarily misplaced your invoice, call them up and give them a stern lecture on how deeply disappointed you are in them.
- Insist that there is no acceptable excuse for late payment. Even if the excuse is that the customer is disputing the amount you charged them because you failed to apply a discount or mistyped the quantity they actually received (because there is no integration between your shipping system and billing system and a data entry clerk has to key in quantity). Insist they should pay now and you will resolve the dispute later.
- Never change your standard payment terms. They worked ten years ago, why shouldn’t they work now?
- Pay on your terms, no matter what. Who cares that the supplier has to borrow at 20% annual compounding interest to float your 120 day payment terms. That’s their problem, right?
- Don’t fret the inventory. If sales ordered it, they’ll move it when they’re good and ready. It’s not your problem, it’s the COO’s.
- Forget next quarter. Wall Street is only going to judge you on this quarter, so do whatever you can to put the books in the best possible light, especially if it’s year end. You’ll figure out next quarter when next quarter arrives.
- Link performance measures to year-over-year profit. Again, that’s all Wall Street cares about, so forget about those pesky savings targets, sustainability initiatives, or long term cost reduction measures. They never materialize anyway, right?
- Focus on quarter-over-quarter cash on hand and net income reporting. Reporting on increases in current and future liabilities just dampens everyone’s mood unnecessarily.
- Don’t be a sucker for early payment discounts. It lowers your cost, but it lowers your cash on hand even more — and that’s what Wall Street will judge you on.
Follow these rules and I ensure you that, sooner or later, you will be making a dash for cash.