Take a microscope to your revenue cycle. Eliminate any potential hiccups in the revenue process and tighten the time from the point you make the sale to the time you have cash in hand. Start with targeting only the customers who can pay by creating a rigorous credit application, then establish clear credit limits up front and clarify details in the purchase order to avoid questions and delays in payment later. Be sure to also make your invoice process speedy and specific, including moving from paper invoices to e-mail invoices that reach customers instantaneously.
Establish a tight credit application process that includes signed bank and vendor references. Be diligent about who you extend credit to and how much. Base your decisions on the best information available. Remember that your best collection work is done before the sale.
Do your homework, continuously. Information is the key when it comes to monitoring credit risks, both before and after they become your customer. Use online tools to keep a close eye on potential credit risks. You can buy one-time reports, conduct your own research via Google and others, or get daily customer credit monitoring through a subscription-based service.
Personal credit histories of company officers are also a good indicator of the company’s ability to pay. Check out any court documents, bankruptcies, liens or judgments against a company.
Avoid credit disasters by watching for– and acting on – the warning signs of increasing exposure to write-offs. Red flags include accounts receivable growing when sales are flat or declining, collection calls failing to yield payment, claims that invoices are lost or questioning the details to delay payment, payment only of smaller invoices, and internal reorganizations that delay payment.
Follow up with customers regarding payment – repeatedly.
To improve company performance, it helps to follow best practices
“How is my company performing and what, if anything, should I be doing to keep on track?
That’s a common question owners should ask themselves daily, writes Pat Brennan at Platinum Group, a Twin Cities turnaround management firm. Just like going on a trip, they know their desired destination – sustainable profitability and working capital sufficiency. Yet without a series of early warning indicators, they begin to lose altitude and can be headed for a crash before they have a chance to make a course correction and save themselves.
It’s difficult to navigate a business using standard financial reporting. A monthly balance sheet, income statement and statement of cash flows just aren’t frequent nor informative enough to stay on top of what’s going on in a business. A decline in order bookings or backlog might signify a decline in revenue. If an owner follows backlog information and sees it dropping day to day, expenses could be cut sooner and working capital preserved. Wrong decisions can be avoided if there is visibility into these numbers.
Many companies operating today lack the necessary working capital to weather a rough period. Owners need information tailored to their business to track progress. There are key best practices that forward-thinkers use to access real-time information about the direction of their business, including:
- accessing current knowledge of their company’s break-even point;
- maintaining a 13-week cash flow report; and,
- designing a performance dashboard.
Combining these best practices can answer the How is my company performing? question. Frequent review of these tools allows owners to make essential changes sooner to impact profitability and preserve critical working capital.
Break-even point
Seeing profits erode into losses month after month, one business owner had exhausted all his working capital, according to Brennan. Retirement accounts were tapped; friends and family had contributed to support the business but all had reached their limit. It wasn’t long before the bank issued a default letter, a precursor to calling the note and/or foreclosure.
This owner, like many others, had lost sight of what it took to be profitable. While his revenues were declining, he had steadfastly maintained the same expense structure, not knowing where the line crossed between profit and loss, and what level of sales he needed to achieve the break-even point, the level of sales necessary to cover fixed expenses.
A consultant helped him to dissect the income statement by classifying every expense item as either fixed or variable. The former would be incurred regardless of whether or not product was made; the latter, only if manufacturing occurred. Rent, payroll, health insurance and bank payments are common examples of fixed expenses, while materials used in manufacturing, commissions and freight would be considered variable expenses.
After identifying his break-even point, the owner clearly saw the need to shed $100,000 in fixed expenses per month. Line by line, expense items were reviewed and difficult decisions were made. The company achieved profitability two months after the restructuring.
Today, this business owner frequently reviews his break-even point to ensure current knowledge of what needs to be sold for maintaining profitability. As sales trends upward or downward, he can make proactive decisions on how to respond, possibly reducing fixed expenses if a sales decline seems permanent.
Cash flow forecast
Despite establishing profitability, this company was still in trouble with its bank, which had responded to the poor historical financial performance by restricting the credit line. Unable to borrow under normal terms, the company had little latitude as it navigated what would be considered the normal ebb and flow of its cash flow cycle. Overspending in a period where cash was tight could mean bounced checks to vendors, so there was urgency to create a weekly cash flow forecast.
The company created a forecast that spanned the next quarter, or 13-week period, focusing on the weekly sales and collection assumption. Priority expenses such as payroll and taxes were made as scheduled, while discretionary payments, if necessary, were deferred until there was ample cash to satisfy them.
Use of the 13-week forecast inherently encouraged a prospective view of cash flow management, a good first step. The next step, comparing actual results for the past week with what was projected that week, gave the benchmark for management to ask some difficult questions: What was projected correctly? Did shipments exceed forecast? Where was the projection off? Did overspending occur? What corrections by management needed to be made to get cash flow back on track?
Using this information, the company was able to make promised payments to its vendors. By sharing it with the bank, the company developed credibility over time by hitting its 13-week forecast and ultimately received extended credit terms, Brennan writes.
Performance dashboard
Once the owner found himself out of the office more often, maintaining current knowledge of his company’s performance was a challenge without access to real-time information, according to Brennan. An Excel spreadsheet was created that contained a series of reports that were critical to running the business, typically known as a dashboard, which could be easily accessed via the Internet.
Like an automobile dashboard with dials for fuel, speed and warning indicators, his business dashboard provided much of the same information to drive the company. His 13-week cash flow and break-even data indicated cash flow sufficiency and velocity.
Other dials were added to monitor quote tracking, order conversions, daily shipments and backlog levels, which gave the owner a perspective on sales momentum. A check register, paired with an accounts receivable and payables report, provided visibility to changes in cash levels.
Using these key best practices, this owner was ultimately able to achieve sustainable profitability and replenish the company’s working capital position. The ability to proactively track performance is critical to every company’s success in today’s fast-paced business climate.
To engage employees, start by communicating early and often
The facts are well known. Engaged employees are more productive. They are more customer-focused. These employees have fewer accidents at work. They are less likely to leave the company, even for better financial opportunities. They feel alignment with the organization and its culture. They feel they have a voice in the company, their department or their job.
So write Kim Hunwardsen and Amy Mettlach, of Eide Bailly in Minneapolis, who add that other facts tell us the majority of employees today do not feel engaged with their company. And although exact numbers vary according to the source, the 2011 Employee Engagement Report conducted by BlessingWhite indicates only 31 percent of employees feel actively engaged in their jobs.
This leaves 69 percent of employees feeling disconnected. It also leaves significant potential for higher training and recruiting costs, more customer defection, more time (and money) lost due to injuries on the job and lower morale among the entire workforce–in short, lower financial performance.
Throw in significant changes at the company, within the industry or in the employees’ work group and the challenges with employee engagement become greater.
What can companies do to create greater engagement with their employees? One company’s recent experience through a significant transition highlights three things companies should try, according to Hunwardsen and Mettlach. They offer the following account about increasing employee engagement, from their own experience at Eide Bailly.
In 2010, accounting firm Eide Bailly announced to its staff and partners that the firm would be relocating its Twin Cities office from Bloomington to the heart of downtown Minneapolis. Once announced, our leadership group knew the physical move would be the easy part. The biggest challenges would center on gaining buy-in to the move and maintaining an already high level of employee engagement.
From personal experience, as well as the experience of advisers who helped plan the move, the following are three key elements to engage employees at all levels and at all times during the year–even when the company is not going through significant change.
First, over-communicate
People want to know what’s going on with the company and their job responsibilities. Ongoing communication, especially during times of change, is a critical element to creating a sense of employee engagement.
Communicate good news so employees can be part of it. Communicate bad news and the implications of that news so employees know what’s going on and don’t spend unproductive hours speculating. Because everyone learns differently, find different ways to communicate: in-person meetings, email, YouTube videos for employees in different locations and one-on-one discussions. Don’t assume a one and done approach to communication, as adults need to hear things multiple times and in multiple formats in order to have full understanding.
Second, gain trust
Employees feel more engaged with their jobs when they trust company leaders and those with whom they work. Creating a safe place for employees to talk about their concerns and challenges helps employees know their issues are being heard, even if the company is unable to help with these issues.
Be honest about what is known and unknown, as well as the company’s limitations and opportunities. Do what you say you will do. If your organization is going through change, involve employees in the change so they feel part of it and in more control, rather than a victim of the change.
To create buy-in to the office relocation, a task force was established comprised of people at all levels. They served as leadership’s communication conduit by seeking input from their peers on specific issues and ideas. They also provided feedback on alternatives and issues under consideration. By trusting these employees to do the right thing and make good recommendations, we were able to achieve significant buy-in on key issues.
In particular, this task force brought value to the office design by helping everyone understand that people work differently and office features needed to reflect that. As a result, the office space welcomes workers of all types with sit/stand workstations, options for piling versus filing documents, open work areas, impromptu meeting accommodations and computer plug-ins located throughout the office.
Third, address the ‘me’ issues
When employees feel that a company knows and understands their me issues–those issues that impact them the most–they are better able to concentrate on their job responsibilities, creating greater engagement. Take the time to understand and address these issues. Employees prefer that you know about their issues, even if you can’t do anything about them. By having people feel their issues are heard, management can create greater engagement among employees.
The biggest me issue with this office relocation related to transportation. Moving from a location where everyone drove and parked for free to one that would require a financial outlay created concern among our staff. To address this, a transportation fair was held in the Bloomington office six weeks prior to relocation. Representatives of parking garages, MetroTransit and other transportation options were available to answer questions and present alternatives. A noticeable sigh of relief permeated the office after the transportation fair, as people now had more information they could use to make their transportation decisions.
Sounds simple, right? If it were, the employee engagement numbers would not be as low as they are. However, an ongoing, concerted effort in these three areas can help create greater engagement and all its accompanying benefits.
