Working capital management strategies and best practices

¶ … chief financial officer must pay close attention to receivables is no surprise to anyone. Receivables are an important potential source of money that can easily be converted into profit, just as easy as it can be lost forever. Management or recovery costs are also to be considered, since they can have a significant impact on the cash-flow creation process.

Beside well-known financial aspects, there are also other effects inefficient accounts payable/receivable management policies may produce on a company: Excessive receivables can both highlight and mask an insidious series of conditions that affect the health and growth of the business. (Sklar, 1998)

In every company there is some sort of conflict between the credit and the sales department. The credit department is responsible for collecting receivables in a swift manner and for not allowing sales that would later cause the company to have collection difficulties. On the other hand, the sales department is pushing for attractive compensation to sales people, wining out over competitors or meeting desired quotas. Questionable sales are often an issue, since the prudent credit personnel is not willing to face any risks, while sales people take a different approach.

Consequently, a company has to have clear policies regarding payments from customers and clients. Authors indicate that such policy should be in writing, strongly upheld by top management, consistently communicated to all clients and to all people in the business with relevant responsibilities. Otherwise, the results are irritation by customers and confusion within the company. This has an impact on profits and the general health of the business. Correction of these problems should be sought in two different places: preventing future potential payment problems and recovering the majority of current receivables at the lowest possible cost.

First of all, the company should prepare a draft of payment policy, spelled out clearly in writing and as unambiguous as possible. Top management must approve it and must be involved as closely as possible, since they have the authority required to put out conflicts between the credit and the sales department. The contents of the policy should include the level of given credit and the circumstances the company is able to grant it. Variations in the policy depend on the structure of the industry or the general economic environment. The policy should not be rigid. Possible exceptions should be mentioned right from the beginning, rather than making them on the way. The customers should be made aware of the general rules, while the sales personnel should know how much they are allowed to deviate form the firm's basic policy.

Another aspect involves the signing of the policy by customers, in addition to properly discussing with them on the matter. Misinterpretation of the policy and non-paying habits are more easily deterred by a signed policy, a copy of which must remain at the customer.

Other collection techniques have been identified. For instance, role-playing is indicated as being a very effective way both for trainees and seasoned professionals. Its purpose is learning how to confront and handle debtor resistance to payment. The objective does not involve devising up a comeback for every debtor excuse, but active listening (Sklar, 1993).

The aforementioned author also indicates a Gallup Organization pole, which found that "Americans value honesty above performance in a financial adviser. Of the 1,000 adults surveyed, 53% said that "trust" and "ethical behavior" were the most important elements in their relationship with a financial adviser. Twenty-four percent listed "good advice" or "makes money for me" as the key factors; 18% cited "expertise"; and only 9% valued "performance record." People are impressed by honesty and trust. Therefore, active listening and a genuine interest in the client's difficulties might solve some of the collection related problems.

2. Long-term relationships between business partners (customers and vendors) are often affected by cash-flow related problems. However, one thing should be mentioned right from the beginning: collection problems are caused by the company, not by the customers. Consequently, the company also has the ability to solve those problems. Obviously, changing payment policies may be easier when handling with new customers, rather established ones.

It was said that "In business, you will win more by being willing to lose a few." (Sklar, 1998). It seems that the customers lost are the ones better off without. Clearer and more effective payment policies build the business faster and better, and since rules are subject to no surprises, everyone should obey them.

Most conversations take place over the phone. Using this instrument effectively involves avoiding harassment and ultimately resolving the account. The goal is to make the debtor pay as soon as possible or, if not, to discover whether the debtor is not able to pay or is not willing to pay. The collector should understand the feelings of the debtor, whether real or faked, and try to dissipate them. Therefore, the debtor may start to understand the logical arguments and the advantages of paying.

As a conclusion, good long-term relations may be kept by treating the client in an ethical manner and by paying attention to its problems. If certain long-term customers do not feel it is their obligation to abide by the rules of the game, the company is probably better of without them.

3. The choice LSports is facing is obviously difficult, since Morgan only contributes a small proportion to its revenue. Putting Morgan out of business by deferring payments simply because it does not have the strength to resist is certainly not ethical. On the other hand, Morgan is responsible for maximum 5% of LSports revenues, so it is not financially sound to put pressure on it, since the other client, Kelly Stors, contributes to 95% of LSports' sales. Consequently, cash-flow problems are solved only on the short-term, since they are caused mainly by poor collection relations with Kelly Stors.