There are many potential benefits to outsourcing – reduction of costs, increased company focus in key areas, variable costs structures, access to skills – but there are also potential risks. Whether you are advising clients or overseeing outsourcing activity in your own organisation, this course will help you to set up, maintain and monitor outsourcing relationships.

Our Outsourcing course helps you to discover the real benefits and challenges of outsourcing, and helps you decide if it will work for you. The course can count as 4 hours of verifiable cpd, so buy it today to use it as part of your 2013 cpd.

By Brian Plowman

Avoiding the pitfalls

Top ten tips when looking to achieve working capital optimisation:

1. WCO programmes must extend beyond the finance function and engage the company’s entire managerial team. Do not think that all working capital management problems can be addressed by treasury alone.
2. Do not artificially adjust working capital levels through delaying payments to suppliers or indiscriminately stepping up collection activities in order to boost quarter- or year-end performance metrics. In business, as in physics, every action is met with an opposite reaction. Delaying payments to vendors may reduce working capital over the short term, but that improvement is likely to disappear over time as vendors adjust their pricing accordingly.
3. Incentivise people to achieve their WCO targets by compensating staff accordingly, particularly at managerial Level
4. Make a consistent effort to optimise working capital. It may be tempting to take the focus away from working capital when the company is growing as there may be less immediate need for it. Equally, in times of crisis, attention can be diverted elsewhere. Ignoring working capital during a downturn could significantly inhibit a company’s ability to grow and meet demand once business rebounds.
5. Ensure all hopes are not pinned on ERP implementation. Although ERP systems can provide significant benefits in the working capital arena, in the near-term they can cause deterioration in working capital performance as key managers and employees are distracted from their daily routines and forced to fine-tune the new ERP system.
6. Connect suppliers and customers across the enterprise to achieve maximum benefits. Demand chain management is now very much to the fore in ensuring suppliers and customers are collaborating effectively
7. Negotiate before it is too late. Use the company’s leverage as a prompt-paying customer to help your bargaining position for better discounts or extended payment terms. This could not only provide cost benefits but also retain the goodwill of your suppliers. Supplier chain management is how major organisations are now using web portals and the like to deliver seamless accounting transparency for all their suppliers and their financial transactions too, wherever they might be in the world.
8. Do not allow debt to become overdue before identifying and resolving disputes. Contact customers before payments are due to resolve any potential disputes and for delinquent payments, assign collection responsibilities to individuals and escalate the responsibility to more senior employees as invoices become further overdue.
9. Develop forecasting techniques that incorporate intelligence from all relevant business segments, including not just sales but manufacturing, distribution and marketing. Evidence from these forecasts will assist in the production of company financial statements to investors.
10. Look holistically at the supply chain. For example, there is a direct correlation between inventory management methods and the level of customer service that a company can provide. Do not allow one area to suffer as a result of focusing attention on another.

Summary

Working capital management is often seen as the responsibility of the CFO though the CEO will we held accountable for any poor corporate performance. But the reality is more complex as working capital is influenced by people in every function.

The art to making a real difference is to find ways to engage everyone in using appropriate tools to analyse and improve the position.

by Juan Carlos Venegas

Do you remember when a famous magician performed the amazing feat of making the Statute of Liberty disappear right before the eyes of thousands of people in New York and millions more on TV?

Did the Statue of Liberty disappear? We know that it did not, although we don’t know how the magician made it appear to have done so.

Money laundering is in essence like stage magic. Does the money actually disappear? Obviously not, it just changes form and gets harder to find, giving the impression that it is clean. The job of the money launderer is, like that of the magician, to use proven and secret techniques to make money obtained in a “dirty” way appear to have been acquired elsewhere and from “legitimate sources”.

People who have studied the problem have characterised money laundering as a cycle, the objective of which is to have access to “clean” appearing money at the end of the process.

On October 11, 2012, Mexico’s Congress approved a long-awaited law aimed at cracking down on money laundering in a bid to attack the finances of the country’s powerful drug cartels.

The new federal law puts restrictions on cash purchases of real estate, jewellery, armoured cars and other assets that criminals use to launder illicit funds. Companies will be required to report large cash purchases under the law. For example car sales of more than 200,000 pesos (about USD 16,000) and real estate purchases of more than 500,000 pesos (about USD 39,000) must be reported. The bill carries a minimum penalty of 5 years in prison.

In another case, HSBC will pay $1.9 billion to settle a US money-laundering probe to avoid a protracted legal battle that would have further embarrassed the British banking giant. The probe of Europe’s largest bank focused on the transfer of funds through the US financial system from Mexican drug cartels and on behalf of nations such as Iran that are under international sanctions. HSBC said in a statement that its anti-money laundering measures were inadequate and it has since made strides in beefing up its controls.

But are the sources of funds what is really relevant? The answer to that would be ‘Yes’. Except in the cases where the sources of funds are not illicit, then the answer would be ‘not necessarily’. Undeclared income from a licit trade or business would become ‘illicit’ or “dirty” and it would be integrated into the financial system, making the financial institution  an aide without knowing it.

Strengthening the measures, reporting requirements and establishing limits to the amount of cash that can be used in certain transactions really helps mitigate the risk and exposure to money laundering. But it cannot be achieved without the co-operation of professionals such as accountants, lawyers, financial advisors and financial institutions among others. They must be aware, and be trained on, the regulations in force in order to comply and ensure that prevention measures are in place.

There is no doubt that money launderers will continue to develop new skills and techniques,improving their schemes and finding new ways to make money appeare to be “clean”. However, we cannot give up on our own development and must remain dedicated in order to stay up to date and combat money laundering.

Anti-Money Laundering will introduce you to the concept of ‘money laundering’ and how it works. You will learn about money laundering schemes and understand the principles and the methods used. The course shows you how to comply with regulations, what is required from you and how to report laundering.

Anti-Money Laundering can count as 4 hours of cpd and is available as part of our 2 for 1 special offer. So buy it today and use the promo code ACPD156 to get any other course completely free.

By Brian Plowman

The CapCut® approach to Working Capital Optimisation

A working capital optimisation project requires discipline in terms of analysis to determine the root causes of problems, propose improvements, model the benefits and implement the changes.

What are the current and future challenges that CAPCUT1 addresses

1. Liquidity is an issue for every organisation. Credit is tight and credit ratings are in disarray. CAPCUT offers an understanding of the ‘drivers’ that are affecting why an organisation may not be seen in the best possible light by investors/credit agencies re historic measures of WC ie DPO/DSO/DI
2. CAPCUT offers a semblance of KPI’s that a bank/PE/VC/financial institution can appreciate as we work with organisations in delivering realistic performance measures of the cash conversion cycle (CCC)
3. As experts in understanding lean processes we deliver as part of the CAPCUT programme a series of workshops, supplemented by relevant questionnaires that ensure that the organisation has robust procedures in place and that all stakeholders from employees to stakeholders obtain visibility of the issues to address. These issues include process failures/breaks in chains of responsibility and can even highlight potential fraud
4. CAPCUT employs a methodology that addresses change in culture through a simple diagnostic tool called CCM – Capacity, Capability and Maturity of the employee, the function, the site, the entity and the corporate structure to ensure that Working Capital can be improved in a timely manner
5. The organisations future working capital strategy may require refocusing and CAPCUT delivers the Demand Chain, Supply Chain and Reverse Supply Chain areas in the new ‘to be’ environment so that it dovetails with Corporate Social Responsibility in areas like Green and community based initiatives
6. Through the CAPCUT programme we can also address issues that may impact profitability as our ‘lean’ approach can utilise a Full Cost Model (FCM) and Risk Review Report (RRR) that highlights at a very early stage whether that customer/supplier is a ‘net positive margin’ generator
7. Finally CAPCUT assists in the disclosure requirements that are needed within company accounts to reflect a robust and ‘going concern’ organisation re cash flow, liquidity and future actions needed to support and service the debt commitments undertaken.

The CapCut approach is built on years of experience. In its generic form it is outlined in the plan shown below. Clearly all organisations are different so an early stage is to ensure that the worksteps are designed to fit the business and the key objectives of the project.

A key output from Phase 1 is a broad identification of the Working Capital Model of the Business that forms the basis for analysis and subsequent proposals for change. A financial model of the current cash flows is also prepared. Later steps in the project use both models as the basis to assess the risks and benefits of proposals to change processes, terms of business and the like when considering options to improve working capital.

The business is analysed ‘against the flow’ that delivers outputs to customers. In other words the principle we adopt is to understand the major issues at the end of the business (ie Receivables) and uncover the possible root causes upstream in the processes.

Continuing further upstream uncovers more upstream problems in the same parts of processes previously identified or in completely different areas and functions. The severity of the root cause will also be assessed (ie High, Medium or Low). For example a problem with trying to collect cash after invoicing may be due to poorly defined terms in the contract. At various points upstream the reasons for a downstream problem should start to become more apparent and thus solutions to the problems will start to form.

A matrix like that shown below is completed during the analysis. Here we see that at the point ‘Inv’ (invoicing) the perceived root causes of invoicing problems lie at the process stages of ‘CP-AC’ (Commissioning Pre-Acceptance Certificate), ‘P&SC’ (Purchasing & Sub Contracting) and most seriously at the ‘Contract’ stage. The matrix below shows that the Contract stage has been identified as a serious root cause for many other stages of the working capital processes.

At each stage the team members will use check lists to assess the process and look for issues and root causes of problems.

An example of investigating ‘Contracts’ is shown below on the left hand column. Each numbered item can be further analysed as shown for ‘Terms of payment’.

The analysis can go further into the detail. For example, under Terms of Payment #4 is ‘Credit Period’ which could be assessed against a checklist as follows:

1. Is the Credit Period expressed as a fixed number of days after a defined event? eg date of order, invoice or shipment
2. Does the procedure avoid referring Credit Period to events over which you have little control? eg. Receipt of invoice, goods arrival on site.
3. Does the procedure avoid uncontrollable delays in the banking system by stating explicitly when payments shall have reached the account?
4. Does the invoice spell out the Due Date, bank account number and also name and SWIFT address of the bank?

Working with a client project team we share a ‘helicopter view’ of the entire scope which exposes stage to stage issues and provides the evidence to develop ideas to make improvements. The team produces a set of ‘blue prints’ that together have to meet the overall working capital business imperatives that are the objective of the project. In particular the team has to be confident the project will deliver the desired outcome within any other imposed constraints.

At the outset the outline working capital model of the business was used to prepare a financial model of the current cash flows. During the immersion session the team model the impact on working capital of making the sort of improvements that have emerged during the immersion session. They will be able to assess the risks and benefits of making various changes and compare these with the general level of difficulty, cost, timing and so forth of making the changes. A summary of the emerging recommendations is prepared for discussion with the board who assess the evidence and team recommendations and thus be in a position to outline their view as to what needs to change and in what priority.

For example, the ‘Credit Period’ analysis [shown above] together with the team’s views should lead to a set of guidelines from the board which might be in the form shown below:

Examples:

“10% of the amount shall have reached our bank account within 15 days from date of order (contract signing)”

“85% of the amount shall have reached our bank account within 30 days from the date of delivery as per shipping documents”

“5% of the amount shall have reached our bank account within 30 days from the date of PAC, however no later than xx days from the date of order/shipment”

Based on the outcome of the immersion session and the sign off by the board of the main features of the ‘To-Be’ working capital target measures, the team prepares the agenda for a series of meetings where the participants develop detailed cross-functional proposals to deliver the changes required to improve working capital. Some decisions to work in a better way can be implemented early on. Other changes will take longer and may require multifunctional teams to be set up. We bring a disciplined approach to record proposals, to develop business cases where needed, and to track implementation.

We disaggregate the high level financial model to create a series of KPIs for various stages along the Working Capital model of the business. The rigour in monitoring these KPIs in each part of the business provide the Executive Team with the assurance that the stretching goals concerning working capital in the strategic plan will be delivered.

Come back after easter when Brian will bring you his top ten tips when looking to achieve working capital optimisation and concluding this series of blogs.

1 Trade Mark 2472440: Pharos Informatics Ltd – Alliance Partner, Develin & Partners.

By Brian Plowman

Can Supply Chain Knowledge save a debtor situation?

…..and avoid an internal credit crunch!

CEOs and CFOs regularly review sales figures and apply metrics that provide them with some visibility of how their organisations are performing in relation to Days Sales Outstanding (DSO). However this number can still mask serious supply chain issues that need immediate attention.

Why?… Because DSO is a lagging indicator in that the problem has already occurred for it to be reflected in the DSO. And even the DSO report date can itself be 30 days old. The real need is to get one step ahead of the causes of problems so you control the DSO. And as the following cases indicate, only a thorough review of the whole supply chain can reveal the true cash cost and extent of the risk an organisation is exposed to.

Getting Hobbs over the hurdles

The recently appointed FD of a large firm of Builders Merchants was alarmed to discover that an old established customer, a contractor, Hobbs, had expanded to take on a large contract which in turn caused cash flow problems which now delayed payments for materials. The FD decided that the Sales Director should try to resolve the matter of delayed payments as he had known Peter Hobbs for years. Peter was the MD, majority shareholder and head of the family firm. Peter provided sets of annual, management and contract accounts that showed that the new large contract represented 70% of all Hobbs’ activity. Peter maintained that if nearly all suppliers extended their credit terms a little and his company paid the workforce from the limited remaining bank facilities, then he could complete the next stage of the contract.

Peter asserted that this would allow the architect to certify that the work has been completed satisfactorily and that the client will pay the next stage of the progress payment schedule. This cash inflow would then enable Hobbs to pay the suppliers, purchase more materials and complete the contract on time. Peter mentions that the contract will however generate a loss and Hobbs will probably only be able to trade on a much reduced scale thereafter.

The Sales Director suggests that Peter’s personal cash assets be used to fund the release of materials to Hobbs to complete the contract by paying them into, or guaranteeing them to, the Builders Merchant. Then when Hobbs receives the stage payment from the client, Hobbs will pay the Builders Merchant for the outstanding invoices which repays Peter’s ‘loan.’

Peter agreed the proposal and the Sales Director tells the FD that this is the only way to avoid Hobbs going into liquidation which would mean nothing being recovered to pay for the outstanding invoices. At that moment the FD received a call from another of Hobbs’ suppliers that warns that Hobbs may go into liquidation and that they too are owed substantial amounts of cash.

So what actions did the FD take to alleviate the problem and satisfy ethical concerns?

1. First he analysed the age of all debts owed by Hobbs and prioritised them based on net margin worth to the company.
2. He then developed a payment programme that resulted in high margin sales being paid first and agreed a timing schedule for Hobbs to pay.
3. He analysed the timings of payment due dates to his own suppliers to alleviate his own creditor situation and ascertain from his suppliers their cash flow issues re discounts on purchases for prompter payments.
4. He married cash receipts from Hobbs to cash payments to his own suppliers.
5. Once the above had been ascertained he agreed with Peter on a way forward without him having to pay any funds out himself as the company was a legal entity and the only cash he should pay should be into his directors loan account, but only after negotiating with his bank for better finance arrangements
6. He suggested factoring of Hobbs invoices so releasing some cash.
7. And the phone call? The FD suggested to that firm that though steps were being made to alleviate issues it would be wise to meet Hobbs as a group to understand all the problems.

Finally for a win/win situation to occur it was in all parties’ interests to understand the extent of the potential loss and rather than let Hobbs drift into insolvently it would be wise to persuade Hobbs to appoint a specialist who could turn around the large contract and establish processes to ensure this commercial debacle did not occur again.

Olympic hurdles

On a totally different project namely the Olympics, suppliers and subcontractors to a tier one contractor could face the same situation of non payment of invoices for some years to come and for years after the Olympics has finished.

The Olympic Delivery Authority says that standard payment terms apply on all primary Olympic contracts, but it has no power over its primary contractors to enforce good terms further along the supply chain. As a result, smaller subcontractors may need to make provisions for later payment terms. This has led various finance providers to start offering firms alternative forms of funding.

Invoice financing can look particularly attractive in such circumstances. Invoice finance providers will advance a proportion (usually 60-70%) of issued invoices up front in order to improve cash flow and cover late payment problems.

Most Olympic projects will have firms incurring start-up, mobilisation costs and increased wage bills but these will not be fully reflected in initial contracts and therefore these firms Working Capital will be hit.

Although most contracts offer a 30 day payment period, SMEs may find they are exposed to late payers. The primary contractors should not have difficulties but their subcontractors need to be especially concerned.

When hurdles become a high jump

So what has the Credit Crunch got to do with these different types of scenarios? A lot is the answer.

Banks, financial institutions, lenders (personal as in Peter’s case) or any organisation that is being asked to ‘find cash’ to finance something must be able to answer the following questions totally, and without any hesitation:

1. When can I expect to get some/all of my cash back into my bank account?
2. What legal basis/redress do I have to reclaim any monies owed?
3. Are there performance bonuses or the opposite by way of penalties should a particular payment not materialise?
4. Do I trust this particular customer and what steps can I take to know that I will be paid on time? (ie visits to places of work, meetings with directors, management and contract accounts regularly available)
5. How can I avoid being reliant upon one particular customer for one large payment of cash that may never materialise?
6. If all else fails what other sources of income do I have to maintain my business?

So is the UK Government or indeed the EU helping? The answer in short is No!

UK SMEs spend 17 working days a year chasing debtors and each SME is owed on average £30,000. One in four insolvencies in Europe are caused as a direct result of late payment even though the EU passed directives and the UK implemented late payment charges for invoices paid more than 30 days late. Sadly 80% of SMEs did not apply these rights for fear of losing business.

Undaunted the European Union has put together 16 ideas for a new directive and these include:

1. Enabling companies to charge late payments against tax, and not making late payment interest charges subject to VAT;
2. Significantly increasing the statutory penalty that should be charged to act as real deterrent;
3. Making all payment periods the same across the whole of the EU (eg pay within 30 days should be stated within all contracts);
4. A European Fund where struggling businesses can obtain support;
5. Forcing companies to declare how much they are owed to enable identification of repeat offenders.

However all this requires a lot of red tape and legislation and the flexibility to compete may be impeded. Some firms are calling for a league table to shame companies and institutions that are frequent late payers.

Meanwhile Credit Insurance Companies are withdrawing their products and insurances policies that cover suppliers and subcontractors for not receiving payment for the materials or services that they have provided. The claim is that the supply chain cannot be properly managed as it becomes ever more ‘invisible’ behind legal contracts.

A thorough review of the whole supply chain can reveal the true cash cost to an organisation and save a debtor situation becoming an unmanageable risk.

In the next part of this blog, available next week,  Brian will look at The CapCut® approach to Working Capital Optimisation.

This means you could get eight of your required cpd hours completed now, for just £75, without leaving your desk.

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Writing a Business Plan helps you to create a well-constructed business plan which allows decision makers to better understand a potential project, helps you to fully think through a project and can be used as a benchmarker to track the success of the project. Throughout the course you follow two case studies from initial idea through to successful plan.

By Brian Plowman

Better Measures = Focused Cash Management

Most construction and engineering Management Information Systems (MIS) reflect the traditional profit and loss, cost centre and balance sheet analyses. However most of this information is just too ‘historical’. And to compound matters comparisons are drawn and variances generated against budgets formulated 12 to 18 months previously.

Even a ‘Cash Flow Statement’ that is produced utilising current bank statements fails to show how transactions recorded at the project level are really impacting a project’s cashflow and whether it is in line with the project manager’s expectations.
In a dynamic and ever changing marketplace these documents are not the true measure of how to manage the business. What is needed is a complete set of new measures that look much closer at the ‘activity levels’ and ‘milestones’ that are at the real coal face of the organisation.

The key is to understand your own and your customers’ and suppliers’ activity levels and milestones achievement and then make improvements which have a significant impact on working capital.

Your business

Firstly, implement a thorough review of projects that are not meeting a certain Net Margin threshold or indeed are cash negative. The issue here is not to rely upon accounting or MIS data but the project managers themselves. They will understand the word Activity for what it really means.

At the coal face they use metrics like milestones and timescales and when these are coupled with activity costs then management can understand the implications on the cashflow for that project and therefore on the company. The big advantage is that this is months prior to the actual figures being compiled in the accounting function. It is a vital early warning system.

Furthermore, steps can be taken at a much earlier stage to ensure cash payments do not exceed cash receipts or that if deployment/mobilisation/tender costs are to be attributed to that contract that the WIP is genuinely invoiced at the appropriate milestones. Should a customer fail to pay in a timely manner then the project manager can instigate the process of penalties against the customer but only after ensuring that the contract itself is not falling behind and likely to incur penalties.

The principle of ‘offset’ can be negotiated so that both the customer and the client do not incur volumes of paperwork but stay on track to deliver the project on time and within cost.

Your customers

Next, look at your customers. Your breadth and depth of customers by sector or by value may give you your first clues as to where you might find, for example, issues of invoices not being paid promptly for any reason at all.

A recent client supplied playground equipment to both the private and public sectors. They found that due to Government initiatives on increasing the time allocated to Physical Education the public sector demanded more equipment and usually paid very promptly. In the private sector however, where leisure facilities dominated the customer base, the orders for equipment reduced and queries on sales invoices increased dramatically. The public’s uptake of membership of these leisure facilities had declined dramatically as they had been hit by 12%+ increases in basic commodities and higher tax bills.

The lesson here was to monitor the customers’ activity of where the products were being applied or installed which would have helped in credit term negotiations.

Also, look at the significant cost of collecting a debt from various sources. Invariably collecting a high value debt from a blue chip company could take an extraordinary amount of time and resource and yet that may never have been costed into the original quote. If that contract was operating at say 2% gross margin then by applying this disproportionate amount of overheads could in fact make this contract’s net margin negative! The decision has to be made strategically as to whether to deal with this client or even this sector in the future.

Your suppliers

When you start to look at your relationship with customers it leads to thinking how you behave as a customer to your own suppliers.

It is in nobody’s interest to have to change a supplier part way through a project and therefore the early warning system of the project manager flagging up late deliveries, quality issues, or purely by inspection of the suppliers’ sites will ensure that steps are taken to solve the problem before the problems impact the project.

Armed with information on activity you can start to communicate a procurement strategy with your suppliers. You may suggest that they could downsize, switch to alternative methods of production, reduce material and labour costs or in fact choose alternative customers themselves!

A more difficult scenario can arise if one of your key customers decreased their demand leading you to consider telling one of your alternative sources of supply that you no longer need their goods or services. If this caused one such supplier to go bust you may have created a risky single source for your requirements for what remains in your backlog or a future upturn.

Activity and milestone measures drive working capital improvements

Do you have the various activity levels properly determined and reflected in your management information systems? Can you see from your DSO or your DPO by sector and by customer and supplier the types of issues described in this paper? If not then your cash flow will suffer.

If you cannot align cash receipts with cash expenditure you can no longer go for the soft loans or extended credit terms as you will find them ’withdrawn’ or at a substantially higher level of overall costs which will impact your margins dramatically.

As a CFO, COO or FD you will need both an early warning system and a clear understanding of who is ‘managing’ the credit aspects at not only your customers and suppliers but also in your own organisation. The finance function can’t do this alone. It must include the sales and procurement functions. The expensive option is to let it be your own bank.

Relying on the lagging financial or management accounts that are portrayed in the monthly and ultimately the Year End accounts to manage construction or engineering projects is a risk.

The use of activity levels in understanding cash flow on each project will have a far greater influence on determining the project’s success. These activity levels could be as simple as man-hours required to complete various stages of a project which obviously incurs wages and expenses. Or even simply measuring the number of times an invoice has not been paid could be a critical early warning of a major disaster that has befallen a critical supplier.

If appropriately defined types of activity levels are utilised then problems associated with cash flow will come to the fore a lot earlier and accurate forecasting of future activity levels will determine the real resource requirements to meet each project milestone.

The challenge is to drop the reliance on the old traditional measures and instead use measuring and monitoring activity levels and milestone achievement as the essential means to put you in control of cash.

Don’t miss the next blog in this series which focuses on whether supply chain knowledge can save a debtor situation.

By Brian Plowman

Work in Progress – Cash or Clash?

When digging deeper into a WIP account of any nature it always makes for an interesting conversation when people are questioned regarding how WIP is valued. The answers you often get raise two unsettling thoughts:

1. Will a customer ever be ‘invoiced’ correctly or at all and the cash collected?
2. Why are the answers clearly at odds with what has been stated by senior management concerning the robustness of the valuation and invoicing processes?

This is not to say that if there was an audit the accounts would be ‘qualified’. More importantly it is staggering to tot up the resulting lost opportunities to generate cash that is rightfully due and, interestingly, opportunities to gain more orders, additional revenue and cash.

However it is easy to ‘clash’ rather than benefit from the ‘cash’. And unfortunately these situations are all too common. But finding, exposing and fixing them, and then learning from them generates plenty of almost instant cash. At a time when the soporific mantra of cash-is-king is insufficient to deal with the credit crunch crisis, any opportunities to pave some of the path with gold should be grabbed eagerly.

Name, shame and blame = Clash

A company in the Construction sector was undertaking a large office building project. Everyone’s perception was that the project had struggled to ‘break even’ at the gross margin level. Being the odd one out drew the attention of the investigation team who focused first on the contractual terms. Eyebrows were significantly raised and teeth noisily gritted with the discovery that timesheets for ‘administrative personnel’ specifically allocated to that project and agreed to by the client had in fact been charged to the P&L of the company as QA and IT overheads!

The senior management team had always maintained that this project was profitable and had berated the workforce for ‘failing’ in maintaining cost controls on the project. In fact it was the posting of one wrong digit on the timesheet account that caused the eight month long ‘problem.’

The culture had always been one of ‘name, shame and blame’ rather than tracing the problem – a recipe to ensure managers and staff just kept their heads down. And so fearful were they that if they realised the errors they did not have the heart to request the money from the client even though it had been accepted contractually.

A brief phone call was made to the customer. An invoice for £65k was faxed to their offices within hours and cash was received within a week!

Averting Clash leads to far more Cash

A company in the Construction sector had an extremely satisfied customer who had accepted final certification of a ‘goods lift’ in a warehouse, but had not taken out a contract with the supplier regarding the maintenance, inspection and emergency breakdown call out.

Then the lift broke down. With a significant amount of embarrassment it was realised that access panels around the lift shaft should have been larger and located in better positions so as to enable maintenance of the lift in easier and more H & S friendly conditions.

The final invoice and retention monies were withheld on the basis that the project contractor should have known of these requirements even though the architects and designers were contracted out. Revenue had been taken on a percentage of completion basis and in fact the whole order value had been recognised as revenue. Thus when invoices were not paid and the likelihood of additional costs were to be borne the whole WIP value had to be reworked, which resulted in a write-off of circa £120K.

The project contractor enlarged the access panels at great cost; normally cause enough for a severe ‘clash’ with the customer, the subcontracted designers and architects. In this instance the project contractor decided ‘strategically’ that they would provide initial free training in maintenance of the lifts, much to the delight of the customer who had expected the usual wrangling.

The project contractor then ‘sold’ their total service package for the lifts as part of the main project with annual renewal terms which won them more projects and even higher net margin work.

In fact a downturn in the commercial project sector meant that the company’s maintenance revenues kept it ahead of its just surviving competitors. Cash flow was regular on such maintenance contracts so from expected ‘Clash’ between various parties, came Cash…and lots of it.

If functions Clash, WIP isn’t Cash

A newly acquired Control Systems company had a project accounting and reporting ‘system’ solely on spreadsheets maintained by project managers and the operations function. The financial accounting system used only financial ledgers so produced no management accounts. The project managers and accountants were at loggerheads as the cash flow discrepancy was now ‘miles apart’.

A short investigation revealed that the financial accounting package could generate meaningful project management accounts. It also transpired that rather than post the WIP figure to the accounts manually from the project managers and operations spreadsheets, the WIP value could be produced automatically. The elimination of accounting duplication saved five full-time administrative jobs.

The production of meaningful WIP accounts that had shared ownership of both project managers and accountants ensured that fast monthly reconciliation resulted in the timely raising of invoices to customers that could then be ‘progressed’ proactively.

Is cash or clash good or bad?

The examples above illustrated three ‘Clash’ scenarios:

1. A culture that set managers against staff.
2. Antagonistic customer/supplier relationships.
3. Inappropriate use of ‘Systems’ that caused a rift between functions.

None of these scenarios is uncommon and there are certainly more than just those we have described. But the key conclusion we have drawn from all of our work with clients is that any form of ‘Clash’ means there will be some risk to ‘Cash’.

The risk of clashes between functions can lead to problems trying to collect cash but also in significant undervaluation of WIP. Clashes between customer and supplier can be turned round counter intuitively so a potential disaster situation could well produce a complete new ‘offering’ or relationship that can save the supplier’s business.

A long history of poor management styles poses a significant barrier to making improvements. These situations tend to change when new management at the top set an enlightened tone. More rarely a sufficiently brave employee is able to prove that bucking the prevailing poor culture will improve cash significantly.

So clash situations aren’t all bad news so long as a lesson is learnt and clash can be permanently averted. Better still is to proactively seek out where clash may be reducing cash and fix the problem speedily.

Don’t forget to come back next week for part four in this series which will look at focused cash management.