Covid-19 and Working Capital: Managing Accounts Payable
Part 1 of a 4-Part Series
Responding to the financial impact of the Covid-19 shut down and disruption requires a firm, unemotional response at a time when that is most difficult to achieve. In this series of articles on working capital management, Focus Management Group will address techniques and approaches for managing each of the components of working capital. Right now, accounts payable management seems to be causing the most stress for companies and their employees.
Focus Attention On Accounts Payable
The management of accounts payable during this phased return to the new normal is critical. A company’s finance and accounting staff is receiving more frequent and more intensive collections calls from the suppliers. Even a company with a history of prompt payment is concerned about cash right now and is feeling the stress, therefore, suppliers are asking their staff to quite literally dial for dollars every day.
How do you help your finance and accounting staff deal with the collections calls?
Provide a road map for your staff to use in responding to calls. Develop a question and answer tool – a script for your staff. Your employees need answers they can share with callers. Address topics such as:
Explain there is a payment plan being developed that will be coordinated by the senior management of the company.
Assure vendors that payment is important to the company, and a plan is being developed.
Provide a time line for return calls, and keep call notes to summarize discussions.
How do you plan your cash payments?
Plan your cash payments on a weekly basis. Develop your Accounts Payable Planning and Management Tool. We recommend that a company review its accounts payable with emphasis on developing the spreadsheet tool to address the following:
Current vendor contact information. Name, title, phone number, email address.
Accounts payable aging information. Total dollars owed by aging category.
Existing payment terms with the vendor. From the purchase orders or invoices.
Historic payment practices for each vendor. Weekly, monthly, on due date, paid at 30 days, etc.
Now for the payment decision making process ask these questions and include the information in your Accounts Payable Planning and Management Tool.
Is this an ongoing vendor? Will you need this vendor in the immediate term?
What is the purchase velocity expected per week? What is the needed delivery frequency?
What is the level of inventory on hand?
When is the next delivery needed?
Use this information in conjunction with the current business situation. Compare and coordinate the information between:
What do the customer purchase orders indicate customers will be needing?
What inventory is on-hand to meet the orders?
What is the production schedule that will be required to meet orders?
Be sure to consider:
Is this vendor the single source of a product that is needed?
Is this an approved vendor that a customer would need to approve for substitution?
Are there alternative vendors?
Once that information is accumulated, critical decisions will need to be made.
Cash Planning: Is a Weekly Cash Flow Needed?
The importance of a weekly cash flow model has never been greater.
This first article addresses accounts payable planning. Future articles will address cash, accounts receivable and inventory. The key for a successful phase back into operations is a working capital plan, with a weekly cash flow forecasting tool is the roadmap.
A company needs to use its accounts receivable to forecast cash receipts, and then forecast its expenses. Consider additional sources of cash, such as the Payroll Protection Program (“PPP”) loans, disaster loans, the Main Street Loan Program or owner investments. Consider a roll forward of the accounts receivable and inventory, under any borrowing base calculations a company is using. These topics will be addressed in more detail in future articles addressing working capital planning.
With this accounts payable information that has been accumulated, the next step is to forecast how much cash is available to pay to vendors each week. Using the Accounts Payable Planning and Management Tool developed using the criteria outlined above coupled with the cash flow forecast, a company will need to come up with a payment schedule and plan for its vendors.
How is the payment schedule used?
Vendors will be ranked based on the criteria identified earlier, and payments will be forecast by individual vendor. Categories of vendors should be developed with different payment strategies.
The most important vendors will require frequent payments based on products being shipped in.
The least important vendors will need to have a payment schedule after business returns to the new normal.
Once the payment plan is outlined, the approach to working with vendors should be divided into groups for communication management. For example, the most important vendors should be communicated with by higher level people in the organization or by the people that have the best relationship with the vendor.
These are the vendors that will directly result in increased sales, receivables and cash for the company.
This level of planning can seem monumental, but it is extremely important now. We all have to manage cash as closely as possible, but also provide a roadmap to the return to new normal. Employees, customers, vendors and bankers will all be happier with a roadmap that outlines what will happen. The initial work to develop the roadmap, and even one aspect of it such as accounts payable, can be overwhelming. With a week of solid hard work, a company can develop its plan.
We are ready to help companies work through their cash flow forecasting and develop their roadmap to the return to new normal. Relative to accounts payable, this means we will need to develop the Accounts Payable Planning and Management Tool. We are able to work with companies to develop their vendor strategy and approach to accounts payable management.