Three rocky business areas your clients should focus on

A down economy undoubtedly brings chief financial officers greater importance within their organizations. At the same time, it also brings special challenges that test a CFO's skills and ingenuity. But trying as these times may be, the basic goals and principles of financial management remain the same.

The difference, however, is that the times do require greater emphasis on the basics, namely managing risks, building incremental profit and maintaining healthy cash flow. To help CFOs identify new ways to adapt to the economy and usher a company through to better times, they should consider how they're dealing with the following three areas.

THINK LIKE A RISK MANAGER

The current economy creates an environment where risks are both greater and less predictable at every level, from big-picture industry issues to day-to-day collections and vendor relationships.

In this environment, one of the greatest risks is to continue operating under existing assumptions. CFOs must be wary of any assumptions that they have made about the downturn and its duration. While optimism has its place, counting on a recovery too soon could lead to overstated revenue projections and overly large budgets, and a resulting depletion of reserves. The current recession has already outlasted its last two predecessors, so we're in uncharted territory.

To control risk, CFOs must re-assess their growth and earnings projections. For many companies, earnings and growth projections calculated on a yearly basis may prove to be too inaccurate over time. Revisit projections made six months or more ago and assess how accurate they have been. If there are already considerable discrepancies between projections and reality, CFOs may need to adjust current budgets to stave off losses. And for the future, they may want to consider the benefits of projections and budgets for shorter periods, potentially trading annual calculations for biannual or quarterly figures.

In addition to adjusting assumptions, developing contingency plans can also help reduce risk. A volatile environment with multiple risks requires multiple backup plans. Developing several worst-case scenarios can benefit any company by helping to avoid on-the-fly decisions if the worst does occur.

One area to look at is the risk passed on by customers and vendors. CFOs must evaluate which customers and vendors are the most critical to the business, and learn about their solvency and overall financial strength. For new customers or vendors, they should perform a credit check. They may also want to take the extra step of requesting trade references and bank references.

For existing customers or vendors, CFOs should take a look at their track record with the company over the past six months. If a vendor's delivery time has lengthened or reliability has slipped in any way, it's safest to assume risk has also increased. Likewise, customers whose payment time has extended significantly may be greater risks.

In addition, CFOs must stay abreast of industry news that affects vendors and customers. A loss of large accounts, increased market turbulence, lower stock prices, or rising raw materials costs for either customers or vendors all serve as warnings of elevated risk.

If customers appear to be rising credit risks, a CFO will want to re-assess any credit extended to them as soon as possible. They may also simply want to encourage customers to pay by credit or charge card, to guarantee timely payment and avoid the risk of slow payment or non-payment.

THE VALUE OF DISCOUNTS

CFOs should target predictable savings and discounts that will help boost profits in a time when profits are soft. Trade terms, for example, are one such opportunity. With diligence, these seemingly small advantages can be significant over the long term. While some terms will allow you to defer payment when cash is short, nearly all reward early payment with a discount. Delayed payment may present greater benefits depending on an organization's cash flow, but when paying early is an option, the rewards are worthwhile. Although 1 percent or 2 percent seems a small amount, it's a deal since these are savings that can be re-invested into the business. If a company isn't able to take advantage of trade terms with some or all vendors, it should look for other options, such as credit and charge cards that offer cash-back rewards, miles or other advantages.

Opportunities for discounts may be less abundant in a down economy, but there is often room for negotiation. CFOs should identify or create additional opportunities by assessing vendor relationships across the board. If they provide steady business to a vendor but haven't been able to negotiate better payment terms, discounted prices or other advantages, then they should consider how they might better their standing, whether now or in the future. For instance, they can consider whether it is worthwhile to formalize a standing order, instead of ordering on an as-needed basis. They might also gain negotiating power by consolidating their business with one vendor.

FINE-TUNE AR AND AP

To create optimum cash flow, accounts payable and receivable have to be more than well-managed; they must work in lockstep. While AR will always present greater unpredictability, streamlining AP can lend more focus to cash-flow efforts.

CFOs should ensure that outflows are not continually due before receivables by standardizing payment dates whenever possible. They should negotiate payment dates with vendors and creditors to streamline payments and better coordinate them with receivables cycles. This can also help reduce the distraction of dealing with payments in a scattered manner and will create more focus in areas of accounting that require greater attention and effort.

They should also look at late payers to determine how they can help keep them on track. When a customer is past due, they should immediately open a dialogue to understand the situation. In addition to learning more about the customer's situation, they should evaluate their own organization's role in late payments. Spot checks in specific late-payer cases will help them determine whether their own accounting system is getting invoices to the customer promptly. They should keep in mind that getting the invoice in the mail is not the last step. Invoices must reach the appropriate customer contact and must contain all essential information, such as purchase order and vendor numbers, so that the customer can process the invoice in a timely fashion.

More than ever, companies are relying on their CFOs to maintain resilience through strong cash flow and appropriate liquidity. By taking into account the risks and challenges of the times, however, they can do more than just weather the economy; they can also use it as an opportunity to build long-term financial standing and get a jump on the competition when the good times return.

Richard Flynn is senior vice president and general manager for American Express Open, a leading issuer of card products for small-business owners.

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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