Surviving the Credit Crunch – Taking Control of The Company's Cash.

The financial press is dominated by poor results, negative outlook predictions and fiscal uncertainty. As oil prices hit new highs, the cost of doing business is increasing at an unprecedented rate and the probability of a recession is growing.

The financial directors that experienced the recession of the early 1990s and the dotcom crash in the early 2000s will recognise the threat. For the next generation of financial directors that are facing a recessionary market for the first time, there are a number of critical lessons that can be learned.

However, in 2008 the banks have their own problems. They are looking at every method possible to reduce their credit exposure and prop up their balance sheets. Lending to cash-strapped business is going to be very low on their agenda. For many mid-sized companies, it means they are financially on their own.

Business can expect the impact to be increasing delay in payments from debtors, reduced or cancelled overdraft facilities, less corporate credit and increasing cost of debt – with the end result that it will force some organisations into bankruptcy. Those failures will increase bad debts and put yet more organisations into difficulty.

TAKING CONTROL

The biggest lesson learnt is that retaining corporate cash becomes king and the best way to do this is not to spend it. That sounds simple enough, but in reality it is much harder to implement than you would think.

The problem is that most accounting departments simply record what has been spent after the event with little to no control over what spend is being committed today. The only weapons in the financial director’s arsenal are the use of budgets, control over supplier payments and headcount reduction. The last option has to take place earlier enough to have a meaningful impact, because it also consumes the most short-term cash.

While finance directors remain accountable for the corporate spend, they have remained totally dependent on the diligence of the budget holding managers to control their spending and that those budget holders are dependant on the individuals that raise the orders. For most organisations, this remains a manual process that has numerous flaws.

The most obvious flaw is the ability of the budget holding management to accurately capture the information, (which may relate to many months into the future), communicate it successfully moment by moment, and control their department – whilst doing their ‘day job’. For most budget holders, financial management is not one of their key strengths and overspending becomes inevitable.

This problem becomes exacerbated when financial pressures require organisations to reduce budget spend. The lack of transparency in committed expenditure often means that the new proposed budget for future periods has already been breached on existing commitments – but this will only become apparent when departmental budget holders do the reconciliation.

It is incredible that in 2008 the finance directors of most medium-sized organisations remain in the dark on the exact financial status of the business and are held hostage by the fiscal and managerial competence of the budget holders.

Yet there are software business automation solutions available that can deliver the finance director total control over corporate expenditure – at last matching their responsibility with the ability to impose their authority and take total control over corporate cash.

These solutions come under a number of names, but the most common include ‘procurement’, ‘e-procurement’, ‘purchase to pay’ and ‘spend control’.

Unlike the majority of ROI pitches, this one is different. If a solution costs say £1,000 per month and results in the company not spending £20,000 per month through budgetary and fiscal control – the cash benefit is abundantly clear. For many organisations, this additional cash in the bank makes the critical difference between survival and failure.

There is no question on the potential growth of this market sector. The decision maker is invariably the person that has the most to lose, the most to gain and the authority to make the decision – the finance director.