* Demonstrate good faith: "There's no doubt about it. When your money doesn't come in, you're in a jam," confesses Jimmy McAndrew, CEO of $9.4-million Matthew Outdoor Advertising Inc., in Parsippany, N.J. His solution: "We pay our staff, our tax bill, our bank, and our priority leases for billboards whatever we owe them when we owe it." Then he divides whatever cash is left over among all his remaining vendors. "It shows we're trying, even if we can't swing the whole bill payment at that time. And we don't just send the money -- we get on the phone and explain what's happening and why and set up an informal workout plan on the spot."
* Protect credit ratings: Since she knows that smaller companies are the ones hardest hit by the credit crunches that accompany recessions, Linda Miles, CEO of Linda L. Miles & Associates, a $1.5-million consulting firm in Virginia Beach, Va., has made it her top priority to pay all bills on time despite what she sees as a temporary slump in sales. "If I have to go to the bank tomorrow to borrow $40,000 to print a marketing catalog, I want to be able to do it. So I'm still paying all our bills at the 30-day point, even though I've had to cut our monthly expenses by $15,000 and put my staff on a four-day workweek." She stopped drawing her own salary a few months ago but is confident she's made the right decision. "In a recession it's more important than ever not to spend what you don't have. We're forecasting a turnaround by midyear 1991, and our company is going to be around to enjoy it."
NINE CARDINAL RULES
How to take control of your payables
A well-managed accounts payable system is, quite simply, managed. It should be given the same attention as the other key systems that constitute your company's cash-flow base: bill collection, inventory management, money management, credit, and other banking systems. Controlling the cash that leaves your company is every bit as important as controlling the cash that comes in through sales, marketing, and collection efforts.
To achieve control, payables must be aggressively supervised by a top manager who knows the company's financial status and goals. That means the chief executive or controller, not an overloaded accounting clerk. Bill payments must be not simply made but planned. Above all, payables must be viewed as a flexible system that you can manipulate in response to other factors such as sales decreases or slowdowns in your own bill collecting.
While there is no such thing as a single accounts-payable system that will work for every company, here are nine rules that well-managed systems should adhere to:
1. Evaluate cash flow. Every accounts-payable strategy should be rooted in a company's current cash-flow realities. To some degree, that's common sense: if it takes 90 days to collect accounts receivable, it's financially self-destructive for you to pay your own bills within 15 days.
That said, few chief executives devote enough attention to analyzing exactly how long it takes dollars spent to be replaced. Ron Weiner, a CPA whose New York City-based firm, Weiner Associates, specializes in working with owner-managed companies, recommends that you monitor your cash-to-cash cycle. This is the length of time that elapses from your expenditure of dollars on raw materials, labor, warehousing, and so on, through the sales and marketing process, until the date you receive payments from your customers.
"That statistic should then become a management tool," advises Weiner. Take a hypothetical case of a distributor who buys a widget on January 1 and pays for that widget on January 30; it takes him 60 days from that point to sell that widget (which brings him to March 31) and 45 days after that to collect his cash (May 15). His cash-to-cash cycle adds up to 105 days, which Weiner describes as "the length of time he's in the hole" after expending his company's cash. "Anything a business owner can do to reduce that number will help his business: collect money from customers faster, sell and distribute faster, or lengthen the number of days that he takes to pay his own bills."
2. Set goals. Once you've evaluated your cash flow, establish written payment goals so there can be no confusion among your bill payers. Avoid a situation in which accounting clerks make the decisions about which bills are to be paid and when -- usually, suppliers who yell loudest are paid the fastest, regardless of the overall benefit to the company.
Bill payments should be timed to coordinate exactly with your company's formal disbursement goals. That means you should date checks no earlier than the dates upon which payments are due (and suppliers should receive checks no more than a day or two earlier than the due date). "At all times," says Paul Parish, a management consultant at the accounting firm of Grant Thornton, in Denver, "a company's goal should be to hold its cash within its own investment accounts until the last possible minute in which payments must be made so as to maintain good relations with its suppliers."
3. Establish payment priorities. Every CEO should be able to set up his or her own two-tiered list of payment priorities, which then becomes part of the company's formal disbursement strategy. Tier one, the group that should be paid at all costs and at whatever terms have been agreed upon, should include major vendors and service suppliers, bankers, and most important, the state and federal tax authorities. Tier two, which offers more room for short-term maneuvering during cash-flow crunches, should consist of minor suppliers whose goodwill is less vital to the company's overall well-being. To avoid confusion, inform your accounting clerks of those payment priorities, by supplier, in writing.
4. Aggressively negotiate payment terms. Granted, there's not much room for negotiation with bankers or tax collectors, but once they're taken care of, everything else on the payables front should be open for discussion. You have leverage to negotiate better-than-usual terms from your major suppliers, especially during recessionary times, when everyone is afraid of losing business. Figure out your optimal payment terms (using the cash-to-cash or other cash-flow statistics as a guide); then -- when orders are placed, not when bills become due or overdue -- negotiate to achieve those terms.
