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If the amount of credit needed by a customer is quite low, then the credit department can authorize it by default, with no further investigation. However, in order to counter- balance this credit with the risk of loss, the amount given is usually very small. In order to authorize a larger amount of credit, the customer should be asked to fill out a credit form, on which is itemized the contact name of the customer’s banker, as well as at least three of its trade references. If these references are acceptable, then the level of credit granted can be increased to a modest level. However, it is a simple matter for a customer in difficult financial straits to influence the credit “picture” that it is presenting to the com- pany, by making sure that all of its trade references are paid on time, even at the expense of its other suppliers, who are paid quite late. To avoid this difficulty, the credit department can invest in a credit report from one of the credit reporting agencies, such as Dun & Bradstreet. The price can vary from $20 to $70 per report, depending upon the type of information requested and the number of reports ordered (the credit services strongly encourage prepayment in exchange for vol- ume discounts). These services collect payment information from many companies, as well as loan information from public records, financial information from a variety of sources, and on-site visits. The resulting reports give a more balanced view of a customer than its more sanitized trade references list. Part of the credit report itemizes the average credit granted to the customer by its other trading partners. By averaging this figure, one can arrive at a reasonable credit level for the company to grant it, too. The report will also itemize the average days that it takes the customer to pay its bills. If this period is excessively long, then the credit department can reduce the average credit level granted by some factor, in accordance with the aver- age number of days over which the customer pays its bills. For example, if the average outstanding credit is $1,000, and the customer has a record of paying its bills 10 days late, then the credit department can use the average credit of $1,000 as its basis, and then reduce it by 5% for every day over which its payments are delayed. This would result in the company granting credit of $500 to the customer. However, credit reports can be manipulated by customers, resulting in misleading or missing information. For example, a privately-held firm can withhold information about its financial situation from the credit reporting agency. Also, if it knows that there are some poor payment records listed in its credit report, it can pay the credit agency to contact a specific set of additional suppliers (presumably with a better payment history from the customer), whose results will then be included in the credit report. Also, the information in the average credit report may not be updated very frequently, so the com- pany purchasing the information may be looking at information that is so dated that it no longer relates to the customer’s current financial situation. If the amount of credit requested is much higher than a company is comfortable with granting based on a credit report, then it should ask for audited financial statements from the customer on an annual basis, and subject them to a review that includes the following key items: • Age of receivables. If a customer has trouble receiving its invoices, then it will have less cash available to pay its suppliers. To determine receivables turnover, divide annualized net sales by the average balance of accounts receivable. In order to convert this into the number of days of receivables outstanding, multiply the average accounts receivable figure by 360 and divide the result by annualized net sales. 30-4 Credit Examination 425 • Size and proportion of the allowance for doubtful accounts. If the customer is reserving an appropriate amount for its expected bad debts, then by comparing the amount of the allowance for doubtful accounts to the total receivable balance, one can see if the customer has over-committed itself on credit arrangements with its own customers. However, many organizations will not admit (even to themselves) the extent of their bad debt problems, so this figure may be underestimated. • Inventory turnover. A major drain on a company’s cash is its inventory. By calcu- lating a customer’s inventory turnover (annualized cost of goods sold divided by the average inventory), one can see if it has invested in an excessive quantity of inventory, which may impair its ability to pay its bills. • Current and quick ratios. By comparing the total of all current assets to the total of current liabilities, one can see if a customer has the ability to pay for its debts with currently available resources. If this ratio is below 1:1, then it can be consid- ered a credit risk, though this may be a faulty conclusion if the customer has a large, untapped credit line that it can use to pay off its obligations. A more accurate meas- ure is the quick ratio (cash plus accounts receivable, divided by current liabilities). This ratio does not include inventory, which is not always so easily liquidated, and so provides a better picture of corporate liquidity. Of particular concern when reviewing these ratios is over-trading. This is a situation in which the current ratio is poor and debt levels are high, which indicates that the customer is operating with a minimum level of cash reserves, and so is likely to fail in short order. This type of customer tends to have a good payment history up until the point where it com- pletely runs out of available debt to fund its operations, and abruptly goes bankrupt. • Ratio of depreciation to fixed assets. If a customer has little available cash, it tends not to replace aging fixed assets. The evidence of this condition lies on the balance sheet, where the proportion of accumulated depreciation to total fixed assets will be very high. • Age of payables. If a customer has little cash, its accounts payable balance will be quite high. To test this, compare the total accounts payable on the balance sheet to total non-payroll expenses and the cost of goods sold to see if more than one month of expenses is stored in the payables balance. • Short-term debt payments. If a customer cannot pay for its short-term debt require- ments, then it certainly cannot pay its suppliers. To check on the level of debt repay- ment, go to the audited financial statements and review the itemization of minimum debt payments located in the footnotes. This should be compared to the cash flow report to see if there is enough cash to pay for upcoming debt requirements. • Amount of equity. If the amount of equity is negative, then warning bells should be ringing. The customer is essentially operating from debt and supplier credit at this point, and should not be considered a candidate for any credit without the presence of a guarantee or security. • Debt/equity ratio. If investors are unwilling to put in more money as equity, then a customer must fund itself through debt, which requires fixed payments that may interfere with its cash flow. If the proportion of debt to equity is greater than 1:1, then calculate the times interest earned, which is a proportion of the interest expense to cash flow, to see if the company is at risk of defaulting on payments. 426 Ch. 30 Customer Credit • Gross margin and net profit percentage. Compare both the gross margin and net profit percentages to industry averages to see if the company is operating within normal profit ranges. The net profit figure can be modified by the customer through the innovative use of standard accounting rules, and so can be somewhat misleading. • Cash flow. If the customer has a negative cash flow from operations, then it is in serious trouble. If, on the other hand, it is on a growth spurt and has negative cash flow because of its investments in working capital and facilities, and has sufficient available cash to fund this growth, then the presence of a strong cash outflow is not necessarily a problem. The key factor to consider when using any of the preceding credit review items is that the information presented is only a snapshot of the customer’s condition at a single point in time. For a better understanding of the situation, the credit department should maintain a trend line of the key financial information for all customers to whom large lines of credit have been extended, so that any deleterious changes will be obvious. If the financial statements are based on one time of year when the seasonality of sales may be affecting the reported accuracy of a company’s financial condition, it may be better to request copies of statements from different periods of the year. For example, the calendar year-to-date June financial statements for a company with large Christmas sales will reveal very large inventory and minimal revenue, which does not accurately reflect its full-year condition. The presence of potential credit problems will typically appear in just one or two areas, since the customer may be trying to hide the evidence from its suppliers. Fortunately, other sources of information can be used to confirm any suspicions aroused by a review of a customer’s financial statements. For example, the sales staff can be asked for an opinion about the visible condition of the customer; if it appears run down, this is strong evidence that there is not enough money available to keep up its appearance. Also, if the customer is a publicly held entity, a great deal of information is avail- able about it through EDGAR On-line, which carries the last few years’ worth of manda- tory filings by the customer to the Securities and Exchange Commission. This information can be used to supplement and compare any information provided directly to the company by the customer. It is critical that the financial information provided by a customer for review is fully audited, and not the result of a review or compilation. These lesser reviews do not ensure that the customer’s books have been thoroughly reviewed and approved by an independ- ent auditor, and so may potentially contain incorrect information that could mislead the credit department into issuing too much credit to the customer. 30-5 COLLECTION TECHNIQUES The collection of overdue accounts receivable can be a messy and prolonged affair that results in irate customers and poor collection results. However, when properly organized, it can result in better customer relations, greatly improved cash flow, and fewer bad debts. To achieve this condition, the underlying collection methodology must be changed, as well as the methods used for contacting and dealing with customers. 30-5 Collection Techniques 427 The first step in improving the collection function is to re-organize the system that tracks overdue accounts. One approach is to purchase a collections software package that can be custom-designed to link to the existing accounting system. These packages contain a number of features that are most useful for the collections person, such as assigning cer- tain overdue accounts to specific collections employees, so that they only see the accounts of customers assigned to them. The software also tracks contact information, stores notes about the most recent conversations with customers, and issues automatic reminders on the dates when customers should be called (even prioritized by time zone, so that calls will only be made during a customer’s business hours). These systems can automatically issue dunning letters by fax or e-mail. The end result is a much more organized approach to col- lections than is normally the case. If a company cannot afford to invest in such an automated system, it is still possi- ble to create a simplified paper-based system that provides some of the same functional- ity, though not with the same degree of efficiency. For example, customers can be allocated to specific collections personnel and the accounts receivable aging report sorted in accordance with that allocation, so that subsets of the report are given to each collec- tions person. Also, many aging reports include information about the contact name and phone number for each customer, so these reports can be used as the basis for collection calls. In order to create a history of contact information, each collections person can main- tain a binder that includes for each customer a list of alternate contact names throughout their organizations, as well as the resolution of preceding collection problems. Here are some of the techniques one can use to contact and deal with customers that can greatly improve the amount of money collected, as well as the speed with which it arrives: • Approve credit levels in advance. Before the sales staff makes a sales call, they should first contact the credit department to see what level of credit will be granted. By doing so, the credit department’s staff is not placed in the uncomfortable posi- tion of approving credit after an order has been received. However, this approach is not of much use if there is limited customer information available, or if the dol- lar volume of each sale is so small that there would not be much risk of exceeding the credit level. • Show respect. Overriding all collection actions taken, it is critical to treat cus- tomers with the proper degree of respect. In the vast majority of cases, customers are not trying to actively defraud a company, but rather are trying to work through a short-term cash shortfall or perhaps have mislaid the payment paperwork. In these cases, shouting at a customer in order to obtain payment will probably have the reverse effect of being paid later in retaliation for the poor treatment. • Increase the level of contact. In keeping with the first point, the level and intensity of contact should gradually increase as the delinquency period extends. For exam- ple, the accounting system can automatically send out a reminder e-mail or fax just prior to the due date on an invoice, which may be sufficient for someone at the cus- tomer to verify that the paperwork is in order and ready for payment. Then, if a pay- ment is slightly overdue, a collections person can send a polite, non-confrontational fax to the customer. The next level of contact would be a friendly reminder call that follows up on the information in the fax. If subsequent calls do not rapidly result in resolution, then the level of contact increases by shifting to the manager of the 428 Ch. 30 Customer Credit accounts payable staff or some higher accounting position, possibly extending up to the owner or president. Only after these attempts have failed should the intensity of contact become more stern, progressing through more strident dunning letters, shifting to a letter from the corporate attorney, and finally being moved to a col- lection agency. By taking this approach, the vast majority of all contacts are made in a low-key and non-confrontational manner, which sets the stage for good long- term collection relations with a customer. • Involve the sales staff. The salesperson who initially sold the product to a customer will have different contacts within that organization than those used by the collec- tions person. By asking the salesperson to assist in collecting funds, a larger num- ber of people can be brought into the payment decision at the customer location. This is particularly effective when salesperson commissions are tied to cash received, rather than invoices issued. Also, if the sales staff is aware of credit prob- lems, they will be less inclined to exacerbate the situation by selling more products to the customer. • Contact in advance for large amounts. If a company has extended a large amount of credit to a customer for a specific order, it makes sense to contact the customer prior to the due date of the invoice, just to make sure that all related paperwork in the accounts payable area is in order, thereby ensuring that the invoice will be paid on time. • Document all contacts. If there is no record of whom a collections person talked to, or when the discussion took place, then it is very difficult to follow up with the correct person after the previously agreed-upon number of days, which results in very inefficient collections work. Instead, each collections person must diligently maintain a log of all activities. If possible, the accounting system should also gen- erate a trend line of payments, so that a collections person can see if there are any developing cash flow problems at a customer. • Agree to and enforce a payment plan if necessary. If a customer simply has no cash available with which to pay off an account receivable, it is reasonable to accept a payment plan under which portions are paid off over time, though one should attempt to obtain payment for the cost of the product as early as possible, so that only the profit margin is delayed. This keeps a company’s own cash position from deteriorating, so that it can continue to pay its own bills. If a payment plan is used, the collections person should send a letter by overnight mail to the customer, con- firming the terms of the agreement, and then contact the customer immediately if a scheduled payment is late by even one day, so that there is no question in the cus- tomer’s mind that the company takes the collection process seriously, and will hold it to the terms of the agreement. • Obtain return of goods if cannot pay. There will be a few instances in which the customer has no ability to pay the company at all. When this happens, try to per- suade the customer to return the products to the company, even agreeing to pay for return freight if necessary. By doing so, the company can resell the goods and earn its profits elsewhere. This concept does not apply if the goods were custom-made, if freight costs are excessive, if the selling season is over, or if the goods may have sustained some damage. 30-5 Collection Techniques 429 • Alter credit terms for problem customers. If it is apparent that a customer is hav- ing ongoing trouble in paying for invoices, then its credit terms must be restricted. This can range from a minor reduction in the dollar total allowed it, or can extend to the use of cash on delivery or even cash in advance terms. This is also an effec- tive collection tool, for the imposition of onerous terms can make a customer more likely to pay for outstanding invoices, if there is the prospect of easier terms once the invoices are paid. • Block shipments to problem customers. If a customer has additional orders in process within the company, the collections person should be able to block their shipment until payments have been received on existing invoices. This action is made easier in some enterprise resources planning (ERP) systems, where one can freeze customer orders in the computer system by resetting a flag field in the accounting database. The preceding recommendations will still allow some bad debts to occur, but the frequency of their incidence and their size will be reduced through the continuing atten- tion to problem accounts that have been outlined here. 30-6 SUMMARY This chapter has shown that there is a variety of ways in which a company can creatively extend credit to its customers, as well as different terms under which that credit can be paid back. A variety of analytical tools can also be used to determine the most appropri- ate level of credit that should be granted to a customer, while the collections function can be organized in such a way that bad debt losses are kept to a minimum. The key factor running through all of these tasks is that the customer credit function requires constant vigilance and careful management to ensure that credit losses are reduced, consistent with corporate credit policies. 430 Ch. 30 Customer Credit 31-1 INTRODUCTION A business of any size is likely to require extra funding at some point during its history that exceeds the amount of cash flow that is generated from ongoing operations. This may be caused by a sudden growth spurt that requires a large amount of working capital, an expansion in capacity that calls for the addition of fixed assets, a sudden downturn in the business that requires for extra cash to cover overhead costs, or perhaps a seasonal busi- ness that calls extra cash during the off-season. Different types of cash shortages will call for different types of funding, of which this chapter will show that there are many types. In the following sections, we will briefly describe each type of financing and the circum- stances under which each one can be used, as well as the management of financing issues and bank relations. 31-2 MANAGEMENT OF FINANCING ISSUES The procurement of financing should never be conducted in an unanticipated rush, with the management team running around town begging for cash to meet its next cash need. A reasonable degree of planning will make it much easier to not only tell when additional cash will be needed, but also how much, and what means can be used to obtain it. 431 CHAPTER 31 Financing 31-1 INTRODUCTION 431 31-2 MANAGEMENT OF FINANCING ISSUES 431 31-3 BANK RELATIONS 433 31-4 ACCOUNTS PAYABLE PAYMENT DELAY 434 31-5 ACCOUNTS RECEIVABLE COLLECTION ACCELERATION 434 31-6 CREDIT CARDS 435 31-7 EMPLOYEE TRADEOFFS 435 31-8 FACTORING 435 31-9 FIELD WAREHOUSE FINANCING 436 31-10 FLOOR PLANNING 437 31-11 INVENTORY REDUCTION 437 31-12 LEASE 438 31-13 LINE OF CREDIT 438 31-14 LOAN, ASSET BASED 439 31-15 LOAN, BOND 439 31-16 LOAN, BRIDGE 440 31-17 LOAN, ECONOMIC DEVELOPMENT AUTHORITY 440 31-18 LOAN, LONG-TERM 441 31-19 LOAN, SMALL BUSINESS ADMINISTRATION 441 31-20 LOAN, SHORT-TERM 442 31-21 PREFERRED STOCK 442 31-22 SALE AND LEASEBACK 442 31-23 SUMMARY 443 To achieve this level of organization, the first step is to construct a cash forecast, which is covered in detail in Chapter 32, Cash Management. With this information in hand, one can determine the approximate amounts of financing that will be needed, as well as the duration of that need. This information is of great value in structuring the cor- rect financing deal. For example, if the company is expanding into a new region and needs working capital for the sales season in that area, then it can plan to apply for a short-term loan, perhaps one that is secured by the accounts receivable and inventory purchased for the store in that region. Alternatively, if the company is planning to expand its production capacity through the purchase of a major new fixed asset, it may do better to negotiate a capital lease for its purchase, thereby only using the new equipment as col- lateral and leaving all other assets available to serve as collateral for future financing arrangements. Besides this advanced level of cash flow planning, a company can engage in all of the following activities in order to more properly control its cash requirements and sources of potential financing: • Maximize the amount of loans using the borrowing base. Loans that use a com- pany’s assets as collateral will offer lower interest rates, since the risk to the lender is much reduced. The accountant should be very careful about allowing a lender to attach all company assets, especially for a relatively small loan, since this leaves no collateral for use by other lenders. A better approach is to persuade a lender to accept the smallest possible amount of collateral, preferably involving specific assets rather than entire asset categories. The effectiveness of this strategy can be tracked by calculating the percentage of the available borrowing base that has been committed to existing lenders. Also, if the borrowing base has not yet been com- pletely used as collateral, then a useful measurement is to determine the date on which it is likely to be fully collateralized, so that the planning for additional financing after that point will include a likely increase in interest costs. • Line up investors and lenders in advance. Even if the level of cash planning is suf- ficient for spotting shortages months in advance, it may take that long to find lenders willing to advance funds. Accordingly, the accountant should engage in a search for lenders or investors as early as possible. If this task is not handled early on, then a company may find itself accepting less favorable terms at the last minute. The effectiveness of this strategy can be quantified by tracking the average interest rate for all forms of financing. • Minimize working capital requirements. The best form of financing is to eliminate the need for funds internally, so that the financing is never needed. This is best done through the reduction of working capital, as is described later in the sections devoted to accounts receivable, accounts payable, and inventory reduction in this chapter. • Sweep cash accounts. If a company has multiple locations and at least one bank account for each location, then it is possible that a considerable amount of money is lingering unused in those accounts. By working with its bank, a company can automatically sweep the contents of those accounts into a single account every day, thereby making the best use of all on-hand cash and keeping financing require- ments to a minimum. 432 Ch. 31 Financing 31-3 BANK RELATIONS Part of the process of obtaining financing involves the proper care and feeding of one’s banking officer. Since one of the main sources of financing is the bank with which one does business, it is exceedingly important to keep one’s assigned banking officer fully informed of company activities and ongoing financial results. This should involve issuing at least quarterly financial information to the banking officer, as well as a follow-up call to discuss the results, even if the company is not currently borrowing any funds from the bank. The reasoning behind this approach is that the banking officer needs to become comfortable with the business’s officers and also gain an understanding of how the com- pany functions. Besides establishing this personal relationship with the banking officer, it is also important to centralize as many banking functions as possible with the bank, such as checking, payroll, and savings accounts, sweep accounts, zero balance accounts, and all related services, such as lockboxes and on-line banking. By doing so, the bank officer will realize that the company is paying the bank a respectable amount of money in fees, and so is deserving of attention when it asks for assistance with its financing problems. Company managers should also be aware of the types of performance measure- ments that bankers will see when they conduct a loan review, so that they can work on improving these measurements in advance. For example, the lender will likely review a company’s quick and current ratios, debt/equity ratio, profitability, net working capital, and number of days on hand of accounts receivable, accounts payable, and inventory. The banking officer may be willing to advise a company in advance on what types of meas- urements the bank will examine, as well as the preferred minimum amounts of each one. For example, it may require a current ratio of 2:1, a debt/equity ratio of no worse than .40:1, and days of inventory of no worse than 70. By obtaining this information, a com- pany can restructure itself prior to a loan application in order to ensure that its application will be approved. Even by taking all of these steps to ensure the approval of financing, company management needs to be aware that the lender may impose a number of restrictions on the company, such as the ongoing maintenance of minimum performance ratios, the halt- ing of all dividends until the loan is paid off, restrictions on stock buybacks and invest- ments in other entities, and (in particular) the establishment of the lender in a senior position for all company collateral. By being aware of these issues in advance, it is some- times possible to negotiate with the lender to reduce the amount or duration of some of the restrictions. In short, a company’s banking relationships are extremely important, and must be cultivated with great care. However, this is a two-way street that requires the presence of an understanding banking officer at the lending institution. If the current banking officer is not receptive, then it is quite acceptable to request a new one, or to switch banks in order to establish a better relationship. The remaining sections describe different types of financing that a company can potentially obtain, including the reduction of working capital in order to avoid the need for financing. 31-3 Bank Relations 433 31-4 ACCOUNTS PAYABLE PAYMENT DELAY Though not considered a standard financing technique, since it involves internal processes, one can deliberately lengthen the time periods over which accounts payable are paid. For example, if a payables balance of $1,000,000 is delayed for an extra month, then the company has just obtained a rolling, interest-free loan for that amount, financed by its suppliers. Though this approach may initially appear to result in free debt, it has a number of serious repercussions. One is that suppliers will catch on to the delayed payments in short order, and begin to require cash in advance or on delivery for all future payments, which will forcibly tell the company when it has stretched its payments too far. Even if it can stay just inside of the time period when these payment conditions will be imposed, sup- pliers will begin to accord the company a lesser degree of priority in shipments, given its payment treatment of them, and may also increase their prices to it in order to offset the cost of the funds that they are informally extending to the company. Also, if suppliers are reporting payment information to a credit reporting bureau, the late payments will be posted for all to see, which may give new company suppliers reason to cut back on any open credit that they would otherwise grant it. A further consideration that argues against this practice is that suppliers who are not paid will send the company copies of invoices that are overdue. These invoices may very well find their way into the payment process and be paid alongside the original invoice copies (unless there are controls in place that watch for duplicate invoice numbers or amounts). As a result, the company will pay multiple times for the same invoice, thereby incurring an extra cost. The only situation in which this approach is a valid one is when the purchasing staff contacts suppliers and negotiates longer payment terms, perhaps in exchange for higher prices or larger purchasing volumes. If this can be done, then the other problems just noted will no longer be issues. Thus, unless payment delays are formally negotiated with suppliers, the best use of this financing option is for those organizations with no valid financing alternatives, that essentially are reduced to the option of irritating their suppliers or going out of business. 31-5 ACCOUNTS RECEIVABLE COLLECTION ACCELERATION A great deal of corporate cash can be tied up in accounts receivable, for a variety of rea- sons. A company may have injudiciously expanded its revenues by reducing its credit restrictions on new customers, or it may have extended too much credit to an existing cus- tomer that it has no way of repaying in the short term, or it may have sold products dur- ing the off-season by promising customers lengthy payment terms, or perhaps it is in an industry where the customary repayment period is quite long. Given the extent of the problem, a company can rapidly find itself in need of extra financing in order to support the amount of unpaid receivables. This problem can be dealt with in a number of ways. One approach is to offer cus- tomers a credit card payment option, which accelerates payments down to just a few days. Another alternative is to review the financing cost and increased bad debt levels associ- ated with the extension of credit to high-risk customers, and eliminate those customers who are not worth the trouble. A third alternative is to increase the intensity with which 434 Ch. 31 Financing [...]... $967,9 18 $ (4 18) $ 30, 788 $ 10, 788 $ 10,000 $ 10,000 $ 30,370 $ 81 2 $ 3,6 68 $ 9,229 $ 9,975 $ 6, 686 $9 68, 336 3/23/01 4,245 8, 715 — 8, 000 89 7,636 $ 9 18, 082 $(49 ,83 6) $ 80 ,000 $ $ 65,000 $ 7,000 $ 30,164 $ $ $ 11,629 $ 5,575 $967,9 18 $932 ,85 0 $ 14,7 68 $ 7,000 $ 7,000 $ 21,7 68 $ 21,7 68 $9 18, 082 2 ,89 7 2 ,89 7 $ 68, 000 — $9 18, 747 4/20/01 $ 9 18, 747 $ 82 9,959 $(14,103) $ (88 , 788 ) $ 17,000 $ 88 , 788 $ 10, 788 $ 10,000... 2,500 $ 53,000 $ 16,937 $ 48, 521 $754,124 May-01 81 5,040 $ 7 98, 554 $(10,0 38) $ 1 98, 788 $ 1 38, 000 $ 8, 000 $ 10, 788 $ 10,000 $ 32,000 $ 188 ,750 $ 18, 500 $ 16,250 $ 25,000 $ 129,000 $80 8,592 Jun-01 85 7,113 $85 7 ,81 6 $ 59,262 $199, 788 $1 38, 000 $ 9,000 $ 10, 788 $ 10,000 $ 32,000 $259,050 $ 14,500 $ 16,250 $ 25,000 $174,525 $ 28, 775 $7 98, 554 Jul-01 446 Ch 32 Cash Management The top row on the report in the... $932 ,85 0 For the Week Beginning on 4/13/01 3/30/01 4/6/01 Cash Forecast 83 3,352 $83 4,924 $ 4,965 $ 8, 000 $ 8, 000 $ 12,965 $ 12,965 $82 9,959 4/27/01 2,500 3,000 8, 700 $ 754,124 $ (80 ,80 0) $ 95,000 $ 10,000 $ 7,000 $ 71,000 $ 7,000 $ 14,200 $ $ $ $83 4,924 5/4/01 (partial) 80 0,439 $80 8,592 $ 54,4 68 $ 85 ,000 $ 14,000 $ 71,000 $139,4 68 $ 18, 510 $ 2,500 $ 53,000 $ 16,937 $ 48, 521 $754,124 May-01 81 5,040 $ 7 98, 554... 10 days have passed, will have a net annualized interest cost to the company of 18. 5% We derive the 18% figure from the 1% interest cost that the company is incurring to wait an extra 20 days to make a payment; since there are roughly 18 20-day periods in a year, the annualized interest rate is about 18 times 1%, or 18% To take the example a step further, if cash is in such short supply that the company... estimates about likely cash positions 444 445 3/16/01 $ $ (2 ,82 2) $ (66,033) $1,034,369 $ 9 68, 336 Total Cash Out: Net Change in Cash Ending Cash: Budgeted Cash Balance: $ 7,000 $ 7,000 $ $ 69,000 7,000 62,000 2,967 Cash Out: Payroll + Payroll Taxes Commissions Rent Capital Purchases Other Expenses 4,1 78 $ 2,355 $ 2,967 — $ $ Total Cash In 1 ,82 3 $ $1,037,191 $1,034,369 3/9/01 Uncollected Invoices: Canadian... points covered include the finance, accounting, production, sales, distribution, and engineering departments Thus, the management of cash should not be considered the sole responsibility of the finance and accounting departments Exhibit 32-2 Annual Interest Cost of Not Taking a Cash Discount If Paid On: 1/10, N 30 2/10, N 30 Day 10 0% 0% Day 20 36.9% 73 .8% Day 30 18. 5% 36.9% Day 40 12.3% 24.6% Reprinted... because invoices are sent out for approval before they are logged into the accounting system, thereby resulting in their late appearance in the forecast, usually just before they need to be paid These problems can be solved by asking suppliers to send invoices straight to the accounting department, and by entering all invoices into the accounting system before sending them out for approval It is also possible... specific items are: • Avoid early payments Though it seems obvious, the accounts payable department will pay suppliers early from time to time This can occur because the accounting staff has already input a default payment interval into the accounting computer, and is not regularly reviewing supplier invoices to see if the payment terms have changed It is also possible that only a few check runs are being... forecast This problem is best resolved by giving the accounting staff complete access to the capital budgeting process, so that it can tell what capital requests are in queue for approval, and when they are likely to require cash payments to obtain In short, the accuracy of the cash forecast requires great attention to processes that provide its source data The accounting staff should regularly compare forecasted... When the cash forecast is generated on a regular basis, the required workload can be extraordinarily high Automation can be used to avoid some of the most time-consuming steps 4 48 Ch 32 Cash Management Many off-the-shelf accounting software packages contain standard reports that itemize the daily or weekly time buckets in which payments are scheduled to be made, based on each supplier invoice date . EMPLOYEE TRADEOFFS 435 31 -8 FACTORING 435 31-9 FIELD WAREHOUSE FINANCING 436 31-10 FLOOR PLANNING 437 31-11 INVENTORY REDUCTION 437 31-12 LEASE 4 38 31-13 LINE OF CREDIT 4 38 31-14 LOAN, ASSET BASED. the level of contact increases by shifting to the manager of the 4 28 Ch. 30 Customer Credit accounts payable staff or some higher accounting position, possibly extending up to the owner or president itemized the contact name of the customer’s banker, as well as at least three of its trade references. If these references are acceptable, then the level of credit granted can be increased to a modest