One of the most common financial problems that companies face today is the lack of funds to finance their current activities. The economic recession that the country is experiencing not only hits the demand for companies' products or services, but also makes it more difficult to collect collection from trade accounts receivable.
The latter also has a strong multiplier effect, since the delay by a company in the payment of its debts affects its ability to pay its creditors, who in turn are late with their suppliers and so on.
In this way, a chain is generated that can put the weakest in serious financial trouble.
Cash flow problems can last for a few days or become a longer-term problem. They are usually difficult to predict and therefore you must be prepared to act quickly and decisively to attack them.
Companies do not necessarily go bankrupt due to losses, but they can disappear because they cannot meet their current payments.
This is more delicate due to the particular situation of the financial sector in Venezuela, characterized by the difficulty that companies face in obtaining loans in the short term, as well as the high cost of this type of financing.
Although cash flow problems are quite common in all companies, each one has different possibilities and ways of solving them.
No one knows the company better than its own managers and therefore it is they who are able to determine what can be done in these cases.
However, there are some steps that can be helpful when designing a cash flow management strategy.
- Postpone new product development.
Consider freezing investments in novel ideas that may have a high degree of risk. Instead, focus your efforts on the products or services that you currently offer.
Explore new markets for existing products or adapt them to better meet customer needs.
- Focus on your current customers.
They are the ones who know your company best and therefore it takes less effort and time to reach them and make a sale. A new client implies identification, contact and negotiation, while with current clients a good part of that path has been traveled.
In this sense, it is important to improve the relationship with customers, identifying their new needs, their level of satisfaction with their products or services, etc. Maintaining a high level of quality in the attention to purchase orders, the quality of the product and the promptness in the dispatch, constitute a positive stimulus for the client in their relationship with the company.
- Stay tuned for inventory.
Proper inventory management is crucial at the cash level of the company. A good practice is to check inventory movements quite frequently.
In particular, those products that have little movement or that represent very little profit margin should be eliminated.
This minimizes the costs of maintaining inventories such as insurance, opportunity cost, obsolescence, space, etc. Offer offers for these types of products (payable in cash). For those products with a high turnover, volume discounts must be negotiated with suppliers.
- Increase workforce productivity.
Better workforce performance translates into a reduction in labor cost and an improvement in the quality of company activities.
In principle, maintain a system for evaluating the work performed by workers and establish goals that allow you to achieve a higher level of sales. For example, monitor the work of the sales force by establishing incentives for those who manage to exceed the established goals.
All incentives must be established based on the fact that the company has received the funds corresponding to the incentive base, that is, on sales actually collected in full.
It is important, whenever possible, to eliminate all those positions that are not absolutely necessary or whose activities can be assigned to other employees without affecting their performance.
In these cases it is important that the entire organization understands the great risk involved in not disclosing the number of employees and the consequences that not eliminating a small number of unnecessary positions could have for everyone.
- Take into account the Value Added Tax.
Venezuelan tax legislation stipulates that VAT must be reported to the treasury even without actually being collected (the carrying out of the operation, the issuance of the invoice or the collection thereof is taken as the basis, whichever occurs first).
Consequently, the potential problem that is generated if a credit is granted to customers and the funds are not available to cancel this tax as a result of those sales must be taken into account.
- Optimize the handling of accounts receivable.
Much of the actual work in managing accounts receivable must be done before they are generated.
The basic starting point lies in the proper setting of the credit conditions that are established for customers.
In many cases, given the need to make sales, payment facilities are granted to clients who see beyond what is appropriate, thus creating a potential bad debt problem that could generate losses for the company. For example, if we have a profit margin of 20%, a bad debt of 2 million generates the loss of profit of sales of 10 million.
It is clear then that setting realistic credit standards that are applied consistently and properly analyzing the credit capacity of customers is a fundamental task in managing accounts receivable.
Regarding the collection activity, we must remember that the greater the maturity of the receivables, the more difficult it is to collect them. For this reason, the collection must be carried out constantly and act as quickly as possible. If there is any dispute with the client that is hindering collection, quickly find the reason and origin and resolve it immediately.
Although it seems only an administrative procedure, taking care of the issuance of the documents that support the credit (commercial invoice or bills of exchange) in such a way that they have legal validity, represents a fundamental aspect when it comes to having to take extreme measures in the collection.
- Control cash outflows.
Identify and eliminate unnecessary or superfluous expenses, try to take advantage of the credit advantages that providers can offer and try to synchronize payments with collections, use the financial instruments offered by the bank to make the most of the cash in banks, use the figure of equipment leasing instead of buying it, carefully review the payments made for commissions, reimbursement of expenses and travel expenses.
Keep a close eye on material purchases before making the corresponding payments.
In particular, be aware of: (1) the product was received in perfect condition, (2) the invoice is prepared correctly (quantity, price, etc.), (3) the relevant discounts have been reflected and (4) the Tax is applicable and has been properly calculated.
- Plan.
Create a cash budget that projects future cash receipts and outlays for the business.
Given that with this information it is possible to know how much cash the company is likely to have, when and for how long, the budget serves as the basis for planning and controlling cash.
The calculation of the “optimal cash balance” must take into consideration an amount to cover current operations, an amount for possible contingencies and an amount represented by a percentage of total short-term debt.
The sooner potential cash flow problems are detected, the sooner work can begin to resolve them.
Taking a proactive rather than reactive attitude will help the company carry out its activities without having the pressure of not having the necessary liquid resources. All the steps that can be taken, however harsh they may seem, will ultimately benefit the company and its employees.
