Cash flow and company failures closely linked

Tighter cash flow management is an issue most U.S. companies need to better address in today’s fiercely competitive business environment. The lessons learned from the high-profile collapses of WorldCom, Enron, Adelphia and Parmalat are a stark reminder that even the seemingly most stable of companies can suddenly saddle its suppliers with the aftermath of uncollectable debt. The Parmalat bankruptcy alone cost U.S. businesses more than $2 billion.

Too many businesses are effectively providing financing for their customers, thinking that it will create goodwill and help business. But each day a customer delays payment costs the supplier a significant amount in bank charges and interest. And it certainly doesn’t buy the seller any more respect from the customer. It’s quite often the reverse.

Allowing customers to pay late can also lead to write offs and impact the bottom line in other ways, including increased need for reserves and borrowing.

As a result, reducing the time cash is tied up in overdue invoices generally provides substantial overall savings, often in the millions for typical mid-sized companies. A well-structured receivables management program also frees up executive time to concentrate on achieving business growth targets, and can help maintain healthy customer relations while protecting against the effects of real trouble on the buyer side.