Using contract management to tame cash flow “monsters”
For businesses of all sizes, cash flow is important. It has a habit, however, of being a Dr. Jekyll and Mr. Hyde topic. One day it’s a routine and “boring” issue, but overnight it can become a “monster” of a problem.
Too much of a lag between incoming cash and outgoing payables and your company can be dealing with serious issues. Late payables to key suppliers/vendors can strain relations. Problems meeting payroll can be downright demoralizing for all involved.
Controlling cash flow well, on the other hand, ensures that a company doesn’t need to seek more credit or financing to bridge brief gaps between payables and receivables. And these days, going to a bank or lender to extend more credit or to investors for emergency financing is a position few companies want to find themselves in.
There is a role contract management can play in helping a business improve its cash flow position. One way is to scrutinize accounts payable and contract payment terms. In a recent Inc.com’s Ask a Banker column, Ed Powers lays out “4 Ways To Create More Cash for Your Business.”
Managing payables are at the top of the list. According to Powers, “Having a controller who pays each bill the day it comes in may actually be destroying value in your company and costing you money.”
The solution is to understand the contract terms – what payment terms are really required? As Powers advises – pay on terms contracts call for, not necessarily “as fast as possible.”
Would a review of payment terms on current payable contracts help your company? Of course, if you or your team is in charge of contract management, this may not be your area of expertise, but a friendly query to your CFO or accounts payable couldn’t hurt.
This attention to payment terms isn’t limited to accounts payable either. Does you company extend “standard” 30-day payment terms for all account receivables? Is that completely warranted? Is there leeway in current contract terms?
Again, the administrator of contract management may not know this, but it helps to flag these issues and ask these questions to interested stakeholders in your company. In the end, asking questions like these do no harm – and they may actually end up improving your company’s cash-flow position.