Building cashflow on firmer foundations – a blog by Philip King FCICM
20 July 2017
There has been much recent press talk of the need for Carillion to repair its balance sheet and, earlier this week, it brought in consultants from EY to assist with a review of its finances.
After announcing a strategic review last week, the group said on Monday that the board had identified actions to reduce borrowing, better manage its working capital, and recover cash that it was owed. Keith Cochrane, the interim Chief Executive, said: “Alongside our own efforts, EY will provide support across the business and bring an external perspective to our cost-reduction and cash-collection challenge.”
I’m not party to any of the details, and wouldn’t pretend to understand the complexities behind the current situation, but recovering cash owed to any business is vital. Any CICM member would be happy to share that nugget of wisdom for, after all, we know that ‘Turnover is vanity, profit is sanity, but cash is reality’. Credit is a tool to achieve sales; it allows buyers to have goods or services now and pay for them at a later date, by which time – in many cases – they have been able to use those goods or services in their own business and generate cash that will pay for the original supply. That’s generally how the supply chain works.
There are three basic elements to credit management: 1. Know who you’re selling to and be sure they’ll be able to pay you back; 2. Agree the terms on which you’re going to trade and payment is going to be made; and 3. Ask for payment by invoicing promptly and accurately, and chasing payment when it isn’t received. This is a message shared through the CICM’s Managing Cashflow Guides aimed particularly at small businesses but just as true for businesses of all sizes, including massive ones.
Sometimes businesses don’t see credit management as important enough to warrant investment or resources. I don’t know, and can’t say anything, about Carillion but would a bit more attention in the right areas have removed the need for expensive consultants? Just asking………