The curse of cash flow issues

As the chilly season of ghouls, ghosts and gore begins, we’re reminded of one of the scariest scenarios plaguing credit managers; the curse of cash flow problems. Whether the issue is seasonal for you or only pops up every once in a while, cash flow issues can trouble even the most experienced credit professionals, regardless of whether it is your company or your customer experiencing the slowdown. 

Why it matters: There are myriad causes for cash flow issues, and they can come from all corners of business such as underbilling customers, paying subcontractors prematurely, high startup costs for a project and even payroll. Cash flow can be stunted by surprises, like lawsuits, disputes and unexpected construction costs. While cash flow problems are often relatively short-term, they are a time-consuming concern for credit managers. 

Cash flow problems vary from industry to industry. Seasonal industries, like agriculture and retail, may experience more cash flow issues. “I’ve spent most of my career working with companies whose customer base was mainly retailers,” said Ray Yarborough, CCE, CCRA, CICP, senior accounts receivable manager at Connexity, Inc. (Santa Monica, CA). “Cash flow issues at these types of companies have always been seasonal, and they tend to occur in Q1. When your customers are mainly retailers, Q4 is always your biggest quarter of the year. While revenue is significant in Q4, so is cost, and the cost often must be paid before payment from customers has been received, resulting in cash flow concerns.”

Cash flow issues might have started to feel a bit more prevalent over the last five years, as the economic impacts of the COVID-19 pandemic reverberated through every facet of industry. 

“A lot’s changed since the pandemic as well, our customers have seen some historic rises in interest rates, and with that came some headwinds for some companies,” said Jamie Sanford, credit manager at Mill Steel Company (Grand Rapids, MI). “And we understand that. So, it depends year-over-year, but I really think because interest rates have gone up, we’ve seen more cash restrictions from our customers, some more headwinds than we usually would.”

With cash flow issues likely to pop up at any moment, it can be hard to resolve these problems swiftly. Yarborough’s advice on how to approach these issues? Plan for it. “If possible, companies should keep a sufficient cash reserve to bridge the gap,” Yarborough said. “If unable to maintain adequate cash reserves, then companies should work with their lenders to either take out a loan or set up a revolving asset-based lending facility.”

For Steve Winn, director of credit at Marek Brothers Systems LLC (Houston, TX), staying on top of collections is vital. “We should know the status of every invoice over 60 days and what needs to happen to get the money in the bank,” Winn said. “We employ various tools, ranging from old-fashioned dunning to legal notices to legal action to promissory notes.”

While issues with collections can slow down cash flow a bit, Yarborough finds that they shouldn’t have a significant impact on cash flow. “Collection issues are often the result of billing issues, misaligned payment terms, or some other type of administrative issue, and once resolved, any previous delinquency that may have existed tends to disappear,” Yarborough said. “While there will always be customers that pay late, I’ve found this to be the exception rather than the norm, and it rarely has any significant impact on cash flow, at least when cash forecasting is done properly.”

Early pay discounts might help resolve short term cash flow problems, but they might not be the best long-term solution for ongoing issues. It might help to have a rigorous onboarding process for new customers that helps ensure that payment terms are clearly understood. Reviewing contracts and establishing special billing requirements early on can help decrease collections issues down the line. 

“My team and I spend very little time on collections, and instead we spend most of our energy on the onboarding process for new customers,” Yarborough said. “As a result, we have very few delinquent paying customers, and any cash flow issues that occur tend to be related to the seasonal nature of our industry.”

The bottom line: Regardless of how they come up or how long they loom over your company’s finances, cash flow problems can be unpredictable and troubling to the most experienced credit managers. A well-organized and prepared company can get through these slowdowns as long as they work together to mitigate the effects of the shortfall. 

“Good cash flow takes a company-wide effort,” Winn said. “It is not dependent upon one or two departments. All cylinders have to be firing.”