3. Establish effective processes
Improving cash flow is not only a matter of finance but also a matter of operation. Different teams need to undertake concerted efforts and stay in line with your organisation's credit policies on a daily basis to achieve favourable outcomes. To facilitate such collaboration, it is imperative to have proper processes in place. Below are three key processes you may want to optimise today.
One requisite of sound credit management is a credit approval process. Without it, companies tend to extend credit just for the sake of sales, or get caught in a vicious circle of obliviously granting insolvent customers credit in order to cut losses incurred by similar customers. To prevent such incidents, it is vital to establish a credit approval process with an authority matrix. The matrix should show different levels of management responsible for different levels of risk entailed in the approval decisions. Some examples are:
- Credit limits under a certain amount should be approved by a credit manager, while credit limits above that should be approved by the chief financial officer (CFO).
- New orders from customers who have not paid previous invoices should be approved by the CFO.
- Any significant deviations from the standard credit terms should be evaluated by the management team.
The higher the risk presented in a decision, the higher the level of management needed to approve it. This is not solely for the purpose of managing risk. By having a procedure for approving which sales opportunities and at what cost, you build a consensus on prudent risk-taking. Besides, by involving the management in the credit approval process, you draw their attention to working capital and its key role in your organisation's viability. As important as it is, the credit approval process should not hold sales up. It is necessary to provide a timeline for finance to review sales' approval requests. This increases transparency and encourages commitment from both sides to go through the process.
When economic circumstances change, you will need to adjust your credit approval process and your credit policies accordingly. Having a solid yet adaptable credit approval process will help your organisation increase profitability with minimum risk.
Food and beverage businesses often do not realise that accounts receivable are the biggest asset on their balance sheet. Unlocking that cash will not only increase margins, but also supply liquidity that sustains growth and retains a competitive edge. More importantly, optimising accounts receivable helps companies remain resilient to uncertainties in the trading and economic outlook. Effective management of accounts receivable starts with accepting the fact that a proportion of your customers will not pay according to the agreed terms. That means all processes related to accounts receivable should be designed to mitigate the risk of providing your customers with free financing at the expense of your margins. For example:
- The invoicing process should have invoices issued with the right information and sent out promptly.
- The collections process should have accounts receivable collected with the right approaches.
- The dispute handling process should have disputes resolved quickly by the right departments – sales, administration, or credit, or a combination of those.
An important link in the chain of accounts receivable processes you may also need to address is the sales team. To encourage accounts that actually benefit your organisation's cash flow, you may seek to affect sales' bonuses based on the bad debts from deals they are responsible for. This will make the sales staff more selective about the customers they approach and more willing to work rigorously on payment terms. To make such interdependence of sales and accounts receivable possible, there needs to be trust and close cooperation between the sales team and the credit team. It is crucial for both to keep in mind that they have a mutual goal: maintaining trade relationships that improve the organisation's profit margins.
The process of producing financial reports in some food and beverage companies may need streamlining more than the processes covered by those reports. Many companies still rely on manual work to aggregate data from different sources, making the reporting process prone to errors and time-consuming. Using technology to automate reporting is a viable option that allows for prompt and reliable reports. This should apply to both in-house processes and processes run by your strategic partners. It is vital to have them aligned, especially to have the reporting from your strategic partners in line with your reporting process and standard. Only then can you have an accurate picture of your cash flow performance and make improvement where it matters most.