Never, Ever Pay Early?

Normally, your vendors will have terms established for the payment of their invoices presented for the delivery of their respective products or services.  In order to maximize cash flow, you should attempt to extend the payment a minimum of a week or two beyond those established terms.  In most cases it should be possible to delay payments due within 30 days to 45 or even 60 days before any difficulty would develop with the vendor.  Manage the account relationship by managing the expectation for the timing of your payments.  Communication is the key.

Apart from the fact that you are a nice person and may feel a need to make people happy, why would you pay early?  What benefits are being derived?  The harsh reality is that unless there is a clear, compelling reason for making early payments to anyone (cash discounts, pricing discounts, special delivery arrangements), DO NOT do it.  Hold on to your cash as long as you possible can by closely managing accounts payable.  Take as long as you possibly can to pay your company’s bills without incurring late fees or impacting your ability to operate.  Because your vendors provide the items that are crucial to the operation of the business, these relationships should be managed carefully.


Certainly, if sufficient cash is available to meet the other obligations of the organization, take full advantage of all cash discount opportunities.  The relative returns from cash discounts are usually quite significant and are well worth the extra effort required to manage shorter payment timeframes.  For example, assume a vendor offers a 2% cash discount for payments received within 10 days as opposed to the normal 30-day terms (2 10, net 30) and your company’s standard payment cycle would dictate that payment be made in 40 to 45 days.  By making the payment within the discount terms you are losing the use of the funds at least 30 days sooner than would otherwise be the case.  However, the company realizes a 2% return for the use of those funds over the one-month period, the equivalent of a 24% annual return (2% x 12 months).  There are very few investment opportunities that offer such attractive returns with the certainty of a cash discount.  This is obviously one of the clear and compelling reasons for paying early.

For help evaluating the impact of this and other financial decisions on your future profitability, visit The Profit Experts.

Employee Turnover: The Most Misunderstood Expense in Business

The cost of turnover is a major problem.  This could be the most misunderstood and under estimated expense in business.  Depending on the capability to recruit, the length of the standard learning curve for new staff and the actual turnover rate, the numbers can be extremely large.

In addition to the direct cost of hiring and training new staff, the financial impact of lost efficiency and the stress induced on current employees resulting from the recruiting period and training requirements after a new hire is quite significant and it cannot be easily calculated.  The problem is threefold.

1.       The process of recruiting and hiring replacement staff can take weeks or even months to successfully complete.  Until it is finished there is a need for existing staff to provide support in completing the tasks required of the vacant position while at the same time meeting the requirements of their own positions. 

2.       Once the process has been completed, the amount of time it takes the new employee to get through the normal learning curve can also take weeks or months.  During that time there is a tremendous gap in productivity vs. compensation.  Until the new employee is fully trained, there is a serious negative leverage working on the profitability of the company. 

3.       Training new employees has both a direct and an indirect affect on current staff members.  Where time is required of the existing staff to train, it directly reduces the time available for them to respond to normal operating issues.  Also, the need to cover gaps in efficiency caused by the learning curve indirectly affects the performance and morale of other staff.  The existing staff members often find themselves in a position where they are unable to complete their own tasks on time while being required to assist in covering the requirements of the newly staffed position. 

Each time these situations occur, the stress on the organization is significant and, depending on the specific circumstances, can continue for extended periods.  The effects are more severe in smaller organizations where the absence of one individual can have a dramatic impact on the overall staffing and there are not as many other employees to cover the gaps in efficiency.  The issues arising from these situations can have far reaching affects on the entire organization. The message here – serious consideration should be given to staff retention and the relationship to overall payroll costs.

One efficient way of augmenting your financial staff with senior-level expertise is by working with The Profit Experts.

Scaling the Profit Mentality

As the size of the company increases so does the level of resources made available for developing extensive complex systems and procedures used to “manage” all areas of the business.  In large companies there are operating divisions which have multiple departments and many functional areas within departments.  There are often teams with cross-functional members to address nearly every issue that arises.  And there are a lot of people to do the things that need to be done.  This is all good and, in most cases, completely necessary.

However, the larger the company, the more levels of management there are and the further the operating staff is removed from the development of the financial model that will determine the company’s future.  There is distance between the direct detailed knowledge of the requirements and the ultimate execution of the activities that most often impact the outcome to the greatest degree.  This distance dilutes the message which then blurs the intent of the directive.  The basic assumptions are that there is a certain dilution that occurs as a message is communicated through the various levels of the organization and additional dilution that occurs as it is translated across non-finance functional lines.  There are an infinite number of factors that may determine the degree to which the dilution actually takes place from person to person.

Without a fundamental understanding of the overall objective (which should be making a profit) and an instinctive ability to make the right financial decision at the right time in order to hit the targets, the actual outcome can quite often be very different from the desired outcome.  The development of a “Profit Mentality” across the entire organization will ensure that every decision is undertaken with a common purpose in mind: the true profitability of the company.

Take your company to the next level of profitability. Visit The Profit Experts to find out more.

Back to Basics: Budgeting Methodologies

There are proponents of a myriad of budget methodologies and there are very legitimate arguments that can be made in support of their diverse opinions.* However, careful consideration should be given to the specific requirements of your organization and the level of resources available to manage the process.  The last thing you want to do is establish a complicated and difficult process without the organizational wherewithal to pull it off.  The chaos created under that scenario would do much more harm to the company (on many different levels) than any benefit that might be derived from the process.

1.            Zero Base budgeting, by definition, requires that each effort begin with a clean slate – at zero dollars.  The details for each line item are then built up based on the fundamentals associated with the specific requirements in support of an anticipated level of business.  There is no presumption that a service or function will be necessary for continuing operations.  Theoretically, any resources believed to be important in support of particular line items must be justified independently for each budget period.  Although it is expected that historical data or trends will not directly influence the current budget decisions, there are certain situations where allowances can be made for minimal operating requirements to be considered essential while still requiring the remaining portion of the line item be validated separately.

This approach is often used in governmental budgeting processes since it reduces the entitlement mentality when appropriations are being determined for the allocation of public funds.  It forces management for each program to re-justify the level of funding every budget year, and therefore, does not allow any inaccuracies of the past to directly affect the new budget.  At a minimum, it would appear to eliminate the “creep” that can occur in an incremental process when proper controls are not in place.

Although this approach is reasonable in the public arena because of the unique requirements of a political environment, it requires a substantial effort in researching and collecting data needed to complete the budget process.  The requirement for resources to support this effort seems to be quite onerous for any but the very largest private sector organizations.

2.            Activity Based budgeting is founded on the notion that certain cost drivers or major activities exist in any particular operation.  A driver could be anything that exists as a major activity in the business of the company (i.e. the processing of an order, a policy or a claim or, the presentation of a customer, a patient or a component for a certain service).  All of the costs associated with the specific drivers (direct materials, direct labor, administrative salaries, office expenses, telephone, any associated overhead, etc.) are compiled as a cost per unit of activity for the purpose of presenting the budget in terms of the company’s products or services being delivered at some expected level.  Each unit of activity would carry with it a specific and predetermined level of cost.

Depending on the number of individual drivers or the multiple variations resulting from unique characteristics in a specific driver (i.e. customers presenting for several different levels of service), you could have many smaller budgets developed somewhat independently.  The compilation of these various budgets would represent the total budget for the organization.  Once the information has been compiled, you must make certain that all cost components have been properly accounted for in the total and are representative of the company’s overall operating profile.

3.            Incremental budgeting assumes that a valid baseline exists in the line items of the company’s historical financial information.  Specific changes in conditions cause each respective line item to increase, decrease or possibly remain flat relative to the prior year(s).

This approach requires a disciplined effort of analysis in order to avoid any unjustified “creep” in the values associated with the prior years’ standards.  To make this process effective, each line item must be reviewed with the purpose of validating the underlying factors that make up the overall total.  For example, the application of some arbitrary “inflation factor” can grossly distort the results and seriously damage the potential of the organization through the pursuit of an improper target.

Although this method is most likely the least resource intensive to manage, without the proper controls there is the potential to allow errors from prior years to be perpetuated and anomalies in the numbers to be ignored going forward.  In order to avoid these problems, careful consideration must be given to the changes in the operating details of the company relative to the expected volume of business when developing the budget.

Only you can decide the most appropriate method for your business given the available resources and specific requirements of the organization.  Choose an effort that causes the organization to stretch a little and work to revise (improve) the process incrementally over time.  The point is to start at a level that does not cause unmanageable stress in the company.  If you persist in improving the process, you will continually reap benefits in the business. 

*The Profit Experts can help you sift through the method that works best for your business. Visit us to find out how.

AR Management Tips

Accounts receivable represents the largest and most accessible source of non-financing cash that your company has available. In order to optimize cash flow there must be a concerted effort to manage A/R each and every day. Unfortunately, experience has proven that most managers don’t attempt to manage A/R with more than a passing thought until there is a problem with cash or a question arises regarding the validity of the recorded balances. Usually, by the time a problem is recognized, the possibility of a full recovery of the cash collection potential is remote.

Revenue without the ability to convert it to cash is of absolutely no benefit whatsoever. In fact, it’s worse than having no revenue because it will surely cost something to generate the revenue that is being wasted. Apart from cash sales, effective accounts receivable management is the means by which revenue is converted to cash. If it does not already exist, you should immediately establish a sustained effort to manage the A/R of your company. You must uncover any issues that impair your ability to collect all amounts billed and develop a plan for working through each to a successful conclusion.

It seems a brief discussion of a few underlying principals would be very helpful in shoring up the conversion process.

Bill promptly and as often as possible. Revenue is the beginning of the process. Therefore, any delay in billing produces corresponding delays in the receipt of cash. Most companies pay on their predetermined cycles (weekly, bi-weekly, monthly, etc.). It’s unrealistic to expect customers to expedite payment of your company’s invoices just because you were late in getting the invoices to them. It may happen a few times, but after a very short time your payments will be delayed until the next cycle comes around. In fact, if you’re always late and the timing is erratic, your customers will most likely place less importance on your payment because you have indicated by your action that the process is not very important to you. Project an image of consistency and urgency and people will respond.

Collect all payments as and when due. If your business requires that certain payments be made as deposits or at time of service, be certain to collect those payments. For example:

1. Printing companies will often require that a large deposit be made for orders of preprinted materials.
2. Medical practices that have contracts with certain payor groups will need to collect co-payments or deductibles from patients when the services are performed.
3. Other companies may require that down payments be made to facilitate a financing arrangement.

If these types of payments are not collected at the appropriate time, the odds of collecting them later are significantly reduced. If problems develop, it’s almost certain you will not collect the cash.

Eliminate all barriers to payment at the outset. Make certain you have the appropriate agreement for the terms of the sale BEFORE you provide the service or deliver the product. Get the appropriate documents signed and the necessary approvals confirmed.

Provide all documentation necessary to facilitate payment at the beginning of the process. It’s very unlikely that you will be paid without a full explanation of the charges and sufficient information to support that explanation. For example, unless a medical practice provides full documentation that corresponds directly to the billing codes entered in the correct boxes on the right forms, they will not get paid, period. There is no discussion or appeal. In fact, the payor has the right to adjust the payment according to their interpretation of the information provided. Why leave that decision to someone who benefits from paying you less money? What information is required to support your charges?

Aggressively follow up on overdue invoices. Although some companies and individuals will pay without prompting, there are many that will be less concerned about a vendor that is not interested enough to call and ask for the check. Often, all that’s needed is a call to ask for an update on the timing of the payment. Other times, you will need to take a firm stand and demand the payment be made. Unfortunately, you have to be willing to be tough when necessary. Otherwise, people will take advantage of you.

DO NOT work only the old accounts. A balanced approach is absolutely necessary. If the focus is only on the older accounts, you ensure that you will always have older accounts. You must work the more current accounts in order to collect them before they become “old.”

Stay on top of the situation. The fact is that the longer you wait, the more unlikely it is that you will collect the full amount that has been invoiced.

Who would you pay first…, a vendor who is sending invoices on a consistent schedule with full supporting documentation and is very diligent in contacting you to determine the status of a timely payment or a company that sends invoices from time to time with little explanation and no follow up?