The New Cash Management Approach – Pay Slower

Could you continue unscathed, if your customers stopped paying you for two to three months and instead paid within 60 and 100 days? On April 16, 2013 an article was published in the Wall Street Journal, “P&G, Big Companies Pinch Suppliers on Payments.” The WSJ article discussed a trend among large companies to push payments out.

If you do not have any large clients, you may not be immune to this trend.  If you provide materials to suppliers of large clients, these clients will attempt to delay payments to you, i.e. attempting to push the payment issue down-stream.

The immediate impact to your business will be the evaporation of your free cash flow.  Your ability to develop new products, make acquisitions, pay dividends, reduce debt, and hire will be greatly reduced.

So what can you do?

I recommend you anticipate the issue.  The following tactics are simply “best practices.”  If you are not affected by this trend, none of these tips will harm you.

– Increase required down payments/retainers. A non-paying customer may be worse than no customer at all, if you incur costs to obtain the business or advance funds to complete the business.

– Tie sales compensation in some form to payments received, i.e. commissions tiering and/or quarterly bonuses.  This tactic will ensure your Sales force is providing quality customers that pay on-time and they stay engaged in the collection process.

– Document and distribute payment terms that provide discounts for early payments; but late fees if payments exceed established timing.

– Stay engaged.  If you are owed, ask for payments.

Doing nothing is ill-advised, as the message relayed to your customers will be, “its ok to pay me late.”

However, if you implement the above recommendations without success, you may need to consider the following two options to address an expected cash crunch –

– Establish a short-term borrowing facility – Short-term financing based on your credit worthiness through a bank.  This option will have a cost which you may not be able to pass to your customer, i.e. negatively impacting your margins; or,

– Consider factoring – Receive an advance against accounts receivables from an asset based lender called a factor.  This option may be required if you don’t quite qualify for a traditional loan.   This option will have a cost which you may not be able to pass to your customer, i.e. negatively impacting your margins.

It will be interesting to see how the credit agencies handle these situations, as a lack of timely payments should impact the credit quality of the delinquent payers, i.e. D&B, S&P, Moody’s…

It will also be interesting to see investors’ perceptions of this change.  There are several financial ratios calculated by investors and analysts that use Current Liabilities as the denominator.  It makes sense that if payments are put-off, Current Liabilities will increase which will impact – Working Capital (Total Current Assets – Total Current Liabilities); Current Ratio (Total Current Assets / Total Current Liabilities); and Quick Ratio (Cash + Accounts Receivable) / Total Current Liabilities).

What are you seeing?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Expense Control through Vendor Management

A primary role of a Chief Financial Officer is to oversee long-term budgetary planning and cost management; as well as oversee cash flow.  It stands to reason that if an expense does not add value to a firm, it should be eliminated.  Unchecked, vendor expenses can quickly become out of control. Are you spending more than you should be with your current vendors?

At different points in my career I have been asked to review the expense side of the company’s Income Statement, specifically vendor costs.  The following approach has been utilized successfully many times over to achieve real savings, from vendors of all sizes –

  • Analyze Vendor expenses – understand the flow, i.e. fixed, variable, and seasonal. 
  • Review the contracts – Are you receiving all services and/or features that you were expecting?  It is not uncommon for technology agreements and/or data agreements to promise everything, but fall short of expectations. 
  • Review your needs – Contracts represent your needs at a point in time, i.e. when they were executed.  It makes sense that an expiring three year contract will include items you no longer need. 
  • Understand pricing – Is pricing today different from when the agreement was established?  What is the pricing from your vendors’ competitors, for new accounts?  Consider in your analysis the cost of conversion, i.e. cost to substitute one vendor for another. 
  • Seek opportunities to bundle – At times a vendor will seek more revenue opportunities by migrating to related services.  Are there cost savings for bundling, that you may benefit from?

Avoid the warranty trap with new technology.  Every new piece of equipment starts with a two year warranty.  When the warranty is close to expiring, you will be offered a warranty extension.  Depending on the price of the equipment, extended warranties may not make sense.  Consider replacement costs.

Decide based on the data you have collected what the proper fee is, for the service or product in question.  Contact your Vendor’s Sales representative and request a concession/discount to obtain your target price.  Do not threaten to leave or reference your data.  A good sales person already knows what competitors offer.  Be prepared to negotiate.

As a policy, review agreements at the time of renewal, at least every three years.  Prior to signing any agreement, be sure you discuss service expectations.  Require that all automatic renewal language, be removed from your agreements.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

What Will Be Your Healthcare Strategy for 2014?

Originally signed in 2010, the Patient Protection and Affordable Care Act (Act) is composed of two separate legislations (HR3590 and HR4827).  Together they make up “Obamacare.”  Provisions began to take effect in 2011 and will continue to be phased-in through 2018.  But in 2014, some primary provisions of the Act will become fully in-force.  Make no mistake.  The law is as complicated as the Tax Code.

To compound the issue, on March 22, 2013, The Wall Street Journal reported medical premium increases are expected in 2014 – UnitedHealth Group projects +25% to +50% for small businesses vs. Aetna Inc. projects +29% for small businesses (“Health Insurers Warn on Premiums”).

In 2014 there will be approximately twelve phase-ins, most of which will be handled by the insurance industry and states.  Businesses need to be aware of the following four provisions – Small Business Tax Credit; Automatic Enrollment; Premium Variation for Participation in Employer Sponsored Wellness Programs; and, Reporting on Minimal Essential Coverage, relating to the Employer Mandate.

The “Employer Mandate” – if an employer has 50 or more full-time “common law” employees, they may be required to offer health insurance coverage to all employees.

Full-time is defined as working 30 or more hours per week, on average.   While a common law employee is defined by the IRS as, “Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”  Individuals that are not employees include leased employees; a sole proprietor, a partner in a partnership or a 2% S-Corp shareholder.

The penalty for non-compliance may be as much as $2,000 per full-time employee, for every full-time employee over a 30-employee threshold.

So understanding medical costs are increasing and you may be required to offer health insurance coverage or pay a penalty, what will be your healthcare strategy?

Following are some options for your consideration –

-Do nothing.  Assume based on the economy Congress will either delay or amend the legislation.

-Reduce the number of full-time employees and replace them with part-time and seasonal employees – the Act anticipated this reaction and has a formula that will calculate “full-time employee equivalents” to identify businesses subject to the Employer Mandate.

Full Time Equivalents = (Total # of monthly PT Employee Hours/120)

-Outsource employees/lease –This option should be considered very seriously.  PEO companies are great at addressing all tax, payroll and reporting processes.  For more information, please review the following blog post – “A PEO is not a “Set it and Forget it Process” located  http://cfotips.com/?p=97;

-Pay Penalty – Of course if after a cost benefit analysis you discover that it is cheaper to pay the penalty, that may be an option.  Do not forget to consider within your calculations the tax implications of this option, i.e. health insurance expenses are deductible vs. penalties which are not;

-Cap company contribution and allow employees to choose coverage through an on-line marketplace.  If the employee wishes a richer plan, the employee would be able to pay more each month. This approach was used by Aon Hewitt, Darden Restaurants Inc. and Sears Holding Corp, in 2013.  Details can be found in the Wall Street Journal, March 17, 2013, “To Save, Workers Take on Health-Cost Risk.”

Whatever option you choose, please consider the impact it may have on your recruiting efforts.  For example – choosing to not offer health insurance and pay the penalty may cause a retention issue for your company that is not easily corrected through your standard recruiting efforts.  You will automatically exclude applicants looking for benefits as possible employees.

Studies show, in the long-run costs will be controlled and more individuals will be covered. However at the individual company level and in the short-run confusion is imminent and in business, confusion leads to mistakes which can be costly.  Not addressing this issue and developing a plan is a very large mistake.

Update – On July 9th, a delay in the reporting requirements of the PPACA, required a delay in assessing the employer shared responsibility penalty until January 1, 2015.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

5 Steps to Effective Segregation of Duties Analysis

Re-Post of a blog written by Teresa Bockwoldt, first posted on www.vibato.com

If you are like most finance executives, you probably would like to minimize the risk of fraud and financial mistakes within your organization. You probably also would like to reduce the chance of an audit-related surprise like a material weakness or waste time and resource effort with out-of-scope situations.

One way to achieve these objectives is to complete a Segregation of Duties (SoD) analysis at the beginning of each fiscal year. This relatively simple process, which takes only a few hours with the right information and tools, can yield big rewards, especially for small or rapid growth companies, or nonprofit organizations where there is an imbalance between number of staff (low) and workload (high).

The SoD analysis describes all the tasks related to your financial transactions and lists the employee or title responsible for handling each of those tasks. And when we say all the tasks, we mean all the tasks, from the most mundane (who opens the mail) to the most strategic (who signs payroll checks). This analysis emphasizes who not how: the SoD focuses on people and tasks, not policies and procedures.

The SoD identifies points in your financial processes where fraud or mistakes might occur and go undetected because one person is completing several finance-related tasks that conflict with each other (segregation conflict). For example, consider the opportunity for fraud if the accounting personnel have access to both your check stock and your signature stamp or if the same shipping and receiving manager receives inventory and investigates inventory discrepancies.

In a good SoD analysis, you would identify these segregation conflicts and develop a way to mitigate them – such as dividing the responsibilities or incorporating a monthly review of transactions by a higher level manager. The goal is to make it harder for anyone who works at your organization (including employees, consultants, volunteers, and Board members) to be tempted to commit fraud. Essentially, you are minimizing organizational risk by removing the opportunity, and hence the temptation, to commit fraud.

Since audits focus on risk and how it is mitigated, the SoD analysis will help both your fraud prevention and audit preparation efforts. Your auditor will be looking for holes within your organization where there might be opportunities for mistakes or concealment. If you can show the auditor you’re identifying and plugging those holes, by providing a copy of your SoD plus a list of follow-up actions, you can reduce the work your auditor needs to do and demonstrate the integrity of your organization’s financial reporting efforts.

A segregation of duties analysis is always completed as part of an audit; so if you do not complete one and show the results to your auditors, your auditor will complete one for you — and charge you for it. We recommend that organizations complete their SoD analyses, either on their own or with help from an objective third party, for several reasons. The biggest advantage in this approach is that an organization will be able to identify and remediate conflicts before the annual audit, thus minimizing the risk of a negative opinion. Another benefit is that if you can show your auditor that you are identifying and mitigating segregation conflicts, it increases their belief that you are running your organization properly and will lower their perception of your organizational risk – this can benefit you in other ways as well.

We recommend a five (5) step approach to completing an SOD analysis:

Step 1: Choose Your SoD Approach

Your executive team has decided to conduct an SoD analysis; now you must determine whether to complete the analysis using only internal resources or with help from a qualified third party.

We strongly recommend bringing in third-party assistance unless your internal audit or accounting team has both the experience and the tools to complete this process efficiently and cost-effectively. As is always the case when hiring a consultant, you’ll need to weigh the consultant’s fees and experience against the time and costs your in-house team would spend creating an in-house tool, researching your auditor’s requirements, collecting the information, and compiling the results.

Another tip: If you plan to do the analysis internally, do some research on the best tools/methods available that you can leverage. There is no reason to create this process from scratch, since a little knowledge will get you a long way towards understanding where you need to focus, and how to collect/analyze/remediate any issues. The more automated you can make your approach, the more reliance your auditors will tend to place on it because you are minimizing the risk of human error.

Finally, you will need to understand what risk levels are acceptable or unacceptable, not just to your organization but to your auditor. So before you start your SoD, review the notes from prior audits and/or ask your external auditors about their top concerns. This proactive approach will help you prioritize the conflicts you find and take action only on the ones that matter to your auditor.

Step 2: Tap Your Knowledge Network

Now that you have a methodology, some tools, and a team, you need to acquire information about who does what within your organization.

Remember, many finance-related activities happen outside the finance organization itself. For example, your receptionists “touch” the finance department if they’re responsible for receiving, opening, and sorting the mail. Similarly, your warehouse staff also “touch” the finance department when they ship products or receive inventory and invoices. For a comprehensive SoD analysis, then, it is extremely important to bring in representatives from the human resources, operations, IT, and finance departments, as well as directors or managers from satellite offices or manufacturing facilities.

Gather all representatives for an in-person meeting or conference call, during which your internal audit leader or consultant will go step-by-step through each finance task, and ask for information about who completes these tasks. It is important to assign titles, rather than individual names, to ensure the analysis stays consistent regardless of the day-to-day human resources changes in the organization (such as absences, resignations, or promotions).

Step 3: Identify and Prioritize Conflicts

Once you’ve assigned titles to tasks, you need to see where your segregation conflicts lie and prioritize them according to your organization’s risk limits. As a general rule, you should pay close attention to conflicts in tasks related to receiving or disbursing cash or checks; wire transfers; managing inventory; and posting journal entries.

Here’s where using an automated, visually-oriented approach pays off. Imagine the time you’d spend sifting through hundreds of pages of documents, manually checking titles and tasks, creating graphics to show the conflicts, and then ranking those conflicts according to risks. Some auditors and consultants still use this manual approach, which makes completing the SoD time-consuming and expensive. You’ll save time and money, and likely get a better result, by using an automated tool that synthesizes the information and provides a graphical output with conflicts highlighted and ranked according to the risks your organization and your auditor have identified.

Step 4: Develop Mitigation Plans

During this step, keep in mind that every organization has some SoD conflicts. Your goal is not to get to zero conflicts but rather to recognize which conflicts you have and to address those conflicts according to the risks they pose to your organization.

Your mitigation options include reassigning responsibilities, hiring more staff, increasing the frequency of cross-checks (like monthly closes), or introducing new approval or reviews either within or outside the finance department. A nonprofit or small company, for example, might ask a board member to review financial transactions, in lieu of hiring another staff member.

Occasionally, your auditor might disagree with how you’ve prioritized conflicts or want a more aggressive mitigation (such as hiring a new employee) that goes against your business realities. In these situations, it’s important to go back to your SoD analysis and prior years’ audits and provide evidence that backs up your assessment. If you have a third party consultant, they should be able to argue your case.

Step 5: Apply Your Analysis Beyond the Audit

You’ll want to share your SoD analysis with your auditors twice – when you’ve first completed it, to ensure that all areas of business risk are covered, and again when they are completing your year-end audit. Meantime, you can apply the lessons learned from your SoD analysis to other areas of your business. Since this analysis will highlight where existing duties are distributed unevenly throughout the applicable resource pool, the tool also helps you make more informed decisions during company-wide or departmental reorganizations. This analysis can be used to justify staffing recommendations to the management team or Board of Directors.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.