It’s not enough to worry about profits for a SMB or tech startup. “Cash is king” is an old, but very true, saying. Management of cash flow is a critical area where the CEO / owner and CFO need to work as business partners.
We’ve observed that working capital is one of the typically under-managed areas for both startups and SMBs in the San Francisco Bay Area. Perhaps Silicon Valley’s quest for aggressive growth and profits overshadows the need for cash flow management by Founders / CEOs and owners. A recent article in CFO Magazine offers the following advice on how to improve Accounts Payable (A/P) which is a crucial piece needed to improve working capital and cash flow:
1. “Let A/P chiefs drive A/P improvements.”
There are often too many people involved with pieces of working capital management and the overall Accounts Payable process. There needs to be someone with a focus on this area.
2. “CFOs or chief procurement officers should sponsor the effort.”
It’s important that both the CEO and CFO are involved to support the decisions related to vendor management as some of those decisions can affect the overall business relationship.
3. “Build a strong alliance between finance and purchasing.”
“While they’re not exactly rivals, finance and procurement executives have sharply different perspectives when it comes to payables. Purchasers decide what they’re going to buy and buy it. Finance and accounting folks focus on the effects of those purchases on company cash flows.”
“For their part, buyers don’t tend to be rewarded for getting the best payment terms and hence don’t often negotiate for them. Sensing that, crafty vendors sometimes try ‘to drive a wedge between finance and purchasing’ by trying to convince purchasers that payables terms aren’t all that significant….”
“4. Approach vendors differently.”
Don’t treat all vendors the same. It’s important to be realistic about the relationship the company has with each vendor. Segment your vendors into different categories and tailor your strategy accordingly.
“5. Start the bargaining from a rigorous baseline.”
“Companies can lose money if they try to negotiate purchasing terms strictly on the basis of price, forgetting to factor in delivery costs, vendor discounts, and allowances. In negotiating longer payment terms, buyers should have a firm grasp of the effect of the purchase on their company’s adjusted gross margin — which includes such costs — rather than simply on its gross margin. If a buyer lacks such an understanding, the seller can manipulate the deal by agreeing to stretch the payment terms but charging too much for doing so.”
“6. Pay for performance.”
“As is the case with all efforts to improve working capital performance, payables projects suffer from a tendency on the part of companies to gauge success — and executive compensation — solely on the basis of the bottom line of the income statement. But since they tend to boost cash rather than revenues, working capital improvements tend to show up as cash assets on the balance sheet or as upticks on the cash-flow statement, rather than as profits.”