Cash and Receivables Management

Optimizing Working Capital Series - Part 2

By Rick Beyer

Identifying and maintaining your optimum working capital is a combination of art and science, as the approach can dynamically shift depending on the company’s revenue growth, corporate development, or outside market factors. Below are insights for lower and middle-market companies for leveraging your cash and receivables:

CASH AND CASH EQUIVALENTS

Consolidate cash accounts:

Having all primary accounts under one roof cuts down the risk of overdrafts and the intensive process of shifting balance between institutions. Consolidation also establishes centralized control by corporate finance teams. Examine your low usage accounts, any accounts of acquired businesses.

Alternative to account consolidation:

Sweeping is practical for companies with ample cash on hand balance but may pose timing logistics for others and may have more considerable fees. Notional pooling is an alternative for sweeping and allows subsidiaries to retain greater control over their balances, but restrictions may exist across borders/jurisdictions.

RECEIVABLES

Credit score your customers: Constructing an internal credit rating provides a strong genesis to determine the payment terms of your customer. Based on the rating outcome, companies can then determine the following: upfront retainers, elements of financing, leverage of product/services over non-payments, early payment discounts, or the need for third-party credit insurance. Keep a log of customers’ payment timeliness and correspondence to review their accounts and credit rating quarterly.

Automate billing: Pinpoint when an invoice needs to be generated in the sales process and have a company-wide standard to implement this policy, leveraging technology. To the extent invoices can be automatically generated and sent electronically to the customer will help reduce or eliminate the “snail mail” float. Also, know the point of the sales cycle when revenue is recognized under GAAP versus deferred and ensure this is reflected within your billing and G/L system.

Accelerate collections: Investing in a strong Receivable’s Manager or collection software often generates the most substantial ROI within an Accounting Department. Knowing when to factor in payment discounts for cash is generally cheaper than tapping a Company’s line of credit. Also, consider using electronic funds transfers, banking lockbox services, remote deposit captures, or third-party credit card processors as ways to speed up cash deposits into your bank.