I help companies when they run out of money. More technically, I help them when they lack the liquidity needed to pay their bills as they come due.
Often, when I arrive, the company has already lost the trust of its trade creditors. But it's not so much because the creditors are owed a lot of money ... it's usually because trade creditors have been told time and again that they would be paid and they weren't.
The creditors were misled, even though senior management knew they didn't have the funds to pay them and weren't likely to, anytime soon.
Why the deception? Most often, it's not that senior management is lying (although they sometimes do). It's that middle managers and below (buyers and so forth) are making promises they can't keep. They don't know the details of the company's liquidity position; they don't have the heart to tell a trusted vendor that they won't get paid; and they simply don't know what else to do.
The need for centralized approval of payments and trade communications.One of the first things I do in these situations is to centralize the approval for making payments. And while most companies have a centralized disbursement function, I am talking about more than that.
The enhanced control I add is to
establish one, central point with authorization to make a commitment on when a check will be cut. After all, there's no faster way to irritate a creditor than to say you will pay when you can't. So I make sure that everyone in the company understands that they
cannot make payment commitments. This is really important.
More specifically, here's what we do...
Phase I: Centralize control over who can make commitments to pay.Understanding what you can pay requires a 13-week cash flow. I have
talked about this before, but as a reminder, schedule payments coming in and payments going out by week and track the cash balance. From this, a list of expected disbursements for the week is generated.
On a daily basis, disbursements should be reviewed and compared against available cash, given the day's cash receipts. From there, decisions can be made on what to pay and what not to pay.
It is critical that those making these decisions be kept informed as to the consequences of not paying particular vendors. For example, is a given vendor needed to repair broken equipment? Depending on the nature of the business, strong communications with manufacturing, purchasing, etc., are needed.
This process gets harder with geographically disparate operations. Most disbursement systems were not designed for detailed review of the item to be paid, beyond invoice number and due date. Sometimes a special report from IT will be needed. But IT or no IT, a process must be put in place so the payment needs of the operating groups or locations are communicated upward, in a way that whomever is deciding what will be paid and not paid understands the consequences of non-payment.
Have a consistent message to all creditors. The organization needs to know what that message is, so communicate it. As to what the message should be,
read this.
Note as well that buyers have to be monitored. They often have long-standing relationships with their vendors and will make payment commitments to keep vendors happy (particularly if a buyer hopes to use a vendor for job references, should things head further south). Sometimes a buyer thinks he can force the company's hand to pay a vendor by making the commitment. Naturally, all of this destroys credibility with the vendor and adds to frustration and anger.
Interestingly, many of my clients have already begun doing much of this before I arrive. But, because senior management often wants to keep its problems a secret, the rest of the organization is unaware of the new process and continues on as before. Of course, most employees know something is wrong, so you might as well be more forthcoming with them.
Phase II: Centralize control over who can make commitments to buy.When things get tight, it is equally important to not make purchase commitments that you can't honor or, with hindsight, rather not make. Once the goods are ordered - and certainly, once they are received - the business owes the money. A process similar to phase I is needed, but for purchase orders.
When should Phase II be put in place? As soon as the forecast shows nothing but negative cash flow. At that point, and unless new funding can be had, you will never be able to pay for these goods. Also, if there are liquidity issues in a manufacturing or distribution business where lots of purchases are made, businesses have to selectively cut inventory levels. It is better for the company to decide what items to not order than have a vendor decide, by saying they won't ship until they are paid.
Controlling purchase orders (or any commitment that leads to the company paying money) is surprisingly hard to do, particularly in manufacturing companies. Why? Because most IT systems were built for a Materials Requirement Planning (MRP) environment; orders pop out based on minimum stock levels and so forth.
One client of mine really struggled with this. They were an old line manufacturer, literally Bridgeport Machine, Inc., that made the old school vertical milling machines that are in shops around the world. Their parent company was in dire straits for the usual reasons and cash was very tight. Bridgeport had a standard MRP system. That is, it used orders to forecast the parts needed, looked at stocks and generated purchase orders. At the time, Bridgeport was nine months into lean manufacturing. That worked short-term wonders for cash flow by dramatically reducing raw materials, work in process and finished goods inventory, along with labor.
The problem was that the buyers struggled to know what parts to order for the lean system. Worse, it became clear that many of the buyers really didn't know anything about the manufacturing process. They were, for the most part, reorder clerks who placed automated orders from the MRP systems and followed up on late shipments. What was the solution? We started looking at special IT reports around week two of my engagement. Unfortunately, it was not long before the lenders filed an involuntary bankruptcy petition and that was that.
If you are a distributor, controlling POs is much easier. When you are out of stock, either you have the money or you don't. There is no bill of materials to struggle with. The danger here, however, is the temptation to try and "keep the customer" by making sure you don't run out of the "core" items. Unfortunately,
profitability for most core items is slim to none (the profit is on the non-core items). For example, when I was in the food service distribution business for Kraft Foods, we gave away the "center of the plate," the meat and potatoes, at cost. We made our money selling cleaning supplies, tabletop items, spices and so forth. So look carefully. In these situations you may need to shrink the customer base to fund the items that carry the margin. Don't let your buyers force this decision on an ad hoc basis.
Centralizing payments and purchases at this level of detail and with this level of control is cumbersome, no question. But it's absolutely necessary to preserve trust with creditors, lenders and others.
And when times are tight, trust is as important as liquidity for survival. 
