Don't wait for a recession to improve your financial management. Why not set aside an hour now to evaluate the strengths and weaknesses of your company's core financial systems? Should the economy slow anytime soon, you'll be prepared to handle reluctant bankers, late-paying customers, problem-plagued vendors, and other recessionary risks. If, instead, the good times just keep rolling, you'll know you've strengthened your company's financial foundation and positioned it for ever-more-profitable growth.
FOCUS YOUR COMPANY'S CHECKUP ON THESE KEY AREAS
Credit and Receivables If you do nothing else, make certain that your credit-and-collection system is operating at peak efficiency. The reason: your customers' payments will inevitably slow down in any period of economic difficulty. You need a collection system that can identify problems early.
Tom Yantis, president of Yantis Corp., a $26 million construction company in San Antonio, gives customers plenty of incentive to pay promptly. "When times are good, we try to build relationships with our major customers that encourage them to make early payments--mainly by offering them very attractive discounts for payments up front," he says. "If they'd have to pay annual financing terms of 12%, we'd calculate our discount at 18% annually or maybe even more."
If your discounts are attractive enough, they can function as an early-warning system. If a customer doesn't take an appealing discount, you may want to examine the account more closely. Ralph Anderson, a tax partner at M.R. Weiser & Co. LLP, an accounting firm with offices in New York City and Edison, N.J., advises all his clients to offer such early-payment discounts. When customers don't take the discount, he says, "don't wait longer than 30 days for payment before you get on the phone and call to figure out what's going wrong. That's the way to minimize your company's exposure" to risk.
Payables To Fran Greene, the founder and president of Sun State Electronics Inc., in Winter Springs, Fla., strong vendor relationships are the key to growth regardless of economic conditions. "Your cash flow is a circle, and you've got to keep everybody in the circle informed--especially your vendors," she says. She makes sure that vendors understand that Sun State sells to large, slower-paying government agencies and so ends up with a 60-day collection cycle. "Now, we could pretend to our vendors that we'll pay them in 30 days, but in many cases, that's not a possibility. So instead, we're honest with them up front, and that way, we build credibility--which is completely essential to do when times are good," Greene explains. "Then, if something goes wrong at some point, and we need to stretch out our own payments a little longer, we don't wind up looking like a bad guy, because the vendors already know and understand our company."
A good rule of thumb: Make certain your company pays bills as smoothly as it collects them. Track your outstanding obligations on a weekly basis. Just as you need a collection plan to deal with customers' problems, you need a plan to respond to unexpected spikes in your own accounts-payable obligations.
Jeffrey Levine, an accountant in Newton, Mass., also recommends comparison shopping among major vendor accounts "at least every couple of years." Too often, he notes, growing companies "don't pay enough attention to cost control until they hit a cash-flow crisis." Smart companies, he argues, should regularly reevaluate important vendor relationships. "Wait for a slowdown," Levine warns, "and you'll find you've got less room to maneuver."