Working capital is a highly effective barometer of a company's
operational and financial efficiency and effectiveness. The better its
condition, the better placed the company is to focus on developing its
core business.
The early, primitive attempts at maximizing cash management can
be traced back to the late 1970s. Unbelievably, there are still some
companies who haven't yet understood that putting cash trapped in the
balance sheet to better use can give them a competitive edge over their
rivals.
A most recent report shows a further reduction of working capital in
companies in the US and Europe compared with the previous year, of
between 3 per cent and 5 per cent. This demonstrates the continuing
increase in the importance of working capital management to help
companies achieve their strategic objectives.
How to do It
There is more to working capital management than simply telling a
company to collect its debtors as quickly as possible, to delay paying
its suppliers as long as possible, and to keep stock levels as low as
possible. A properly conceived and executed improvement program will
certainly focus on optimizing each of these components, but will deliver
additional benefits that extend far beyond the merely operational. It
will demonstrate the need for ambitious corporates to integrate working
capital management into their strategic and tactical thinking, rather
than view it as an optional bolt-on extra.
There are a number of dos and don'ts to help guide corporate thinking.
Firstly, do think of working capital management as a strategic
objective that can enable your corporation's goals. We cannot
over-emphasize this opening point. The same factors that drive a
company's working capital also drive its operating costs and customer
service performance. Therefore, by addressing the drivers of working
capital a company will also experience significant improvement in
operating costs and customer service.
For example, a company's working capital is deteriorating due to an
increase in past due accounts receivable (AR). A review of the overdue
AR illustrates a high level of customer disputes. The disputes are
taking on average 30 days to resolve and consuming significant amounts
of sales, order entry, and cash collectors' time. By tackling the root
cause of the disputes, in this case poor adherence to pricing policies,
the company can eliminate the disputes, thereby improving customer
service.
This will free up the time of staff in sales, order entry and cash
collections, enabling them to be more effective at their designated
roles. This in turn increases productivity, reduces operating costs,
and potentially increases sales. Working capital will improve, as
customers will have fewer reasons to hold payment. This example
illustrates how working capital is one of the best indicators of
underlying inefficiency within an organization.
Consider Another Perspective
Don't think of things only from your own company's perspective. If you
can help your own customers plan their inventory requirements more
efficiently, for instance, you can match your production to their
consumption, efficiently and cost-effectively, and do the same with your
own suppliers. The potential implications for inventory levels are
huge. By aligning ordering production and distribution processes, you increase inherent efficiency and achieve direct cost savings almost instantly, as a by-product. And then you discuss the best way to bill or to pay.
Do educate your organization to consider the trade-offs between
different working capital assets when negotiating with customers and
suppliers. Depending on the usage pattern of a raw material, there may
be more to gain from negotiating consignment stock with a supplier
versus pushing for extended terms. This could apply particularly in
cases of long lead-time items, or those that require high minimum order
quantities.
Agree On Formal Terms
Do agree on formal terms with suppliers and customers and document those
terms carefully. Keep them up to date, and communicate those payment
terms to employees throughout your business, particularly those involved
in the customer to cash and purchase to pay processes, including your
sales organization.
Don't allow prolific new product introduction without a clear product
range management strategy. Poor product range management creates
inefficiency in the supply chain, as companies are required to support
old products with inventory and manufacturing capability. This increases
operating costs and exposes the company to an obsolete inventory that
may have to be disposed of.
Collect your Cash
Don't forget to collect your cash. Many businesses fail to implement effective ongoing collection procedures
to prevent excess overdue funds or build-up of old debtors. Ask
customers if invoices have been received and are clear to pay. If not,
identify the problems that are preventing timely payment.
Confirm and reconfirm the credit terms agreed upon with the customer.
Often, credit terms get lost in the translation of general payment terms
and what's on the payables ledger in front of the payables clerk. Do
devote the requisite amount of time and attention to the critical issue
of dispute management.
Don't set top-down targets uniformly across the business. For instance,
too many companies impose a 10 per cent reduction in working capital for
each division. This fails to take into account the potential
opportunity within a division and can result in setting an impossible
target that acts to de-motivate. Instead, balance top-down with
bottom-up intelligence when setting targets.
Targets Drive Behaviour
Do set targets that drive the desired behaviour. Many companies will
incentivise collections staff to minimize the aged AR over 60 days.
Does this mean that customers who pay one to 60 days late are good
payers? No, aged AR over 60 days will result in increased costs and time
it takes to collect the debt. By incentivising staff to lower
the amount over 60 days, you keep your costs down. Do educate staff,
customers and suppliers that cash and cash management are important, and
are an integral part of a successful business relationship.
Look Within Yourself
Don't assume that all the answers are to be found externally. Before
approaching existing customers and suppliers to discuss cash management
goals, fully understand your own process gaps so you can credibly
discuss poor payment processes.
Do treat suppliers as you would like your customers to treat you. Far
greater cash flow benefits can be realized by strategically leveraging
the relationship you have with suppliers and customers. In addition, a
supplier is more likely to support you in an emergency if you have
treated them fairly.
Don't however, treat everyone the same. Use segmentation tactics to
split your customer supplier into similar groups. This may be based on a
basket of criteria including profitability, sales, AR size, past due
debt, average order size and frequency. Define strategies for each
segment based around the criteria and your strategic goals.
Do celebrate success in hitting targets. Emphasise the actions that helped you get there.
Conclusion
To summarise briefly, following the dos and don'ts will enable you to
optimize cash and to highlight inefficiencies in your processes that
must be remedied to better serve customers. It will enable you to build
stronger partnerships with your suppliers across the total working
capital value chain. This translates ultimately into improvement in
bottom-line results, often a good deal quicker than you might expect,
and helps clarify the senior management focus on strategic imperatives.
Author Bio
REL Consultancy Group www.relconsult.com
are global specialists in generating cash improvements, cost reductions
and service enhancements by optimizing working capital. They are the
only international corporate financial consulting firm that focuses
exclusively on increasing operational efficiency from working capital
and operations. They work with people to transform your organization,
your customer's and your suppliers in more than 60 countries around the
world.
Showing posts with label accounts receivable. Show all posts
Showing posts with label accounts receivable. Show all posts
Monday, February 3, 2014
Tuesday, June 11, 2013
16 Common Mistakes Young Startups Make
But hard as it may be, don't let that statistic discourage you. Some startups are destined for failure. Perhaps the team is working on a product that really isn't that great or useful. Maybe they're trying to tackle too many problems at once. Or maybe the co-founders have a poisonous relationship that will hinder the company's growth. Maybe they never thought about product-market fit. Whatever your company's "fatal flaw" may be, you can likely avoid it in your own venture if you take some advice from people who've gone through the early startup phase before. Lucky for you, time-strapped entrepreneur, we've gathered some tips from the pros to help you avoid some of the most common, game-ending mistakes committed by young startups. Check out the tips below from founders, CEOs and investors alike.
1. Forgoing Simplicity
"Building a product is like packing a suitcase: Plan out what you think you need. Then remove half." — Jonathan Wegener, Founder, Timehop and ExitStrategy
"Young founders tend to complicate things too much, from structuring partnership agreements, financing, leases, etc. This is not a place to be creative; keep it simple, follow the norms and be transparent so everyone is on the same page." — Jay Levy, Co-Founder, Zelkova Ventures and Uproot Wines
2. Waiting Too Long to Launch
"Don't underestimate the importance of Minimum Viable Design. Your first product will likely be just a little bit ugly, and that's okay — it's part of getting to market quickly and testing your idea in front of live customers. But don't underestimate the importance of achieving a basic threshold of "this looks good (and reputable)." In my first company, people liked our product but were embarrassed to share it because the design and presentation was so poor. When we launched The Muse, the result was the opposite — nearly 25% of the people who visited our site shared it with someone else via social media!" — Kathryn Minshew, Founder/CEO, The Muse
3. Hiring Poorly
"Make sure that new hires understand your rate of innovation. You are small and agile, which means you have a high rate of innovation and growth, and with that comes work! Often times, that work eventually goes beyond your job description. At a small company, employees need to wear many hats, and they need to be prepared to wear many hats. If you don't manage this expectation upon hiring, you will be managing employee issues six months down the line. Those issues will eat into your time, and time is money for a new CEO." — Kellee Khalil, Founder/CEO, Lover.ly
"Someone told me recently, 'Any time I'm talking to someone who doesn't work for me already, I'm evaluating if I should try and hire them.' Whether that's someone you want to hire tomorrow or someone you'd like to work with in five years depends on your company, but every entrepreneur should always be recruiting." — Ally Downey, Co-Founder, WeeSpring
"Some entrepreneurs think it’s a luxury to have accounting, finance, or other support functions, but it’s important not to be afraid of spending resources early on for administrative efficiency. If you don't have someone to do that for you, you'll end up spending all your time on things that aren't critical to growing your company." — Matt Salzberg, Founder and CEO, Blue Apron
4. Not Embracing Agility
"If you sat down and wrote out a pros and cons list comparing your startup to your corporate competitors, you'd probably find the big gorilla's list of advantages more than daunting. But on your side of that chart should be words like 'nimble,' 'flexible,' 'speedy,' and 'free flowing.' Many entrepreneurs seem to approach their startup like they would a quest to win the Super Bowl, with very defined steps leading to a pre-conceived single, solitary end goal. This doesn't really work for a startup. While it's vital to have goals and a clear vision, to survive and thrive you'll have to keep an open mind and stay agile enough to follow the path where it leads." — Jeff Jackel, CEO, BuzzMob
5. Guarding The "Big Idea"
Execution. And no one else will execute the way you do. Third, you're going to need help and guidance from people who know more and have been there before, so you better get comfortable sharing your 'big idea.'" — Jeff Jackel, CEO, BuzzMob
6. Losing Focus
“I think many startups have difficulty finding a focus. As an entrepreneur, there's a lot going on. You have countless decisions to make, and you have to keep moving quickly. Settling on a clear focus — your product, your audience, your strategy — is critical from day one. Of course, as you move forward, you must be willing to adapt. But remember to hold tight to that big idea as you go.” — Alexa von Tobel, Founder & CEO, LearnVest
"One thing I have learned building Grand St. is the value of intense focus. Trying to complete only a few things each week means doing an excellent job on all of them, whereas trying to do the 27 things I want to do usually results in mediocre or incomplete work. The same goes for the product itself — there's a laundry list of features we want to add, but keeping the experience simple and uncluttered makes us really focus on what our users really want." — Amanda Peyton, Co-Founder, Grand St.
"Founders of a young company will come up with hundreds of new ideas every day (I know my co-founders and I do). While most of these ideas are sure to be good ones, we’ve learned that we need to be thoughtful and selective about which to move forward with in order not to overwhelm ourselves and our employees. We all have limited time and resources, which is why we need to focus and prioritize." — Matt Salzberg, Founder and CEO, Blue Apron
"At times we have sat on ideas for months, before testing them and finding out that they are runaway successes. At other times, we have exhausted ourselves trying out 100 different things, when none of them work. I watched a great video with Barbara Corcoran, called "How to get more customers, step 1." What she describes is that many businesses, when they are looking for more customers, will try 100 different things, when they already have one thing that is working. As she puts it, this strategy leads to very few new customers and lots of exhaustion. She recommends that instead, founders look at what has been working and double or triple their efforts there." — Adda Birnir, Co-Founder, Skillcrush
7. Assuming Virality
"A lot of new founders think, 'If I build it, they will come.' I have news for you: They're not coming and you're not going to 'go viral.' Services don't spontaneously go viral. High virality is almost always the product of early and deliberate product design decisions. Spend some serious time thinking about how and why people are going to discover and share what you're building." — Jeremy Fisher, CEO, Days and Wander
8. Obsessing Over Funding
"Many young entrepreneurs think that raising VC money is a measure of success. There is a lot of money chasing bad ideas. The only thing that matters is building a viable, growing and profitable business." — Brian Garrett, Co-Founder, StyleSaint and Venture Capitalist
9. Chasing Investors Instead of Befriending Investees
"A common mistake startups make in trying to meet investors is, counterintuitively, focusing too much on networking with actual investors. The best way to get a meeting with a VC is not by incessantly pursuing him or her, but rather by getting an intro from a founder that the VC has already invested in. Befriend funded entrepreneurs. Every VC will tell you that they will take meetings with 100% of the companies that their existing portfolio founders recommend. Don't spend all your energy emailing and LinkedIn-ing VCs; instead, get to know founders who have been funded and win them over because their stamp of approval is one of the most valuable data points for an investor." — Sam Teller, Managing Director, Launchpad LA
10. Dwelling on Things
"A lot of new founders tend to over-optimize every single decision, which makes it difficult to actually move forward with anything. One of the most important lessons my co-founders and I have learned is that sometimes the best course of action is to make a call and just move forward. As a young company, nothing is ever perfect, but if you believe in an idea or strategy, you just need to move forward and manage the logistics and risks as you go." — Matt Salzberg, Founder and CEO, Blue Apron
11. Getting Distracted By Feedback
"A startup is not a newly democratic nation state: Not every decision needs to be made by the collective. While we love getting ideas from our team and have seen some stellar product development and user experience decisions generate from brainstorming and having an open office environment, we try not to let everything come to a vote. We hire smart and capable people to come up with an idea and execute it: Not to have to balance the opinions and feedback of everyone, all the time." — Elizabeth Scherle, President & Co-Founder, Influenster
"You will have a ton of people constantly sharing their feedback and opinions of your business with you. It's easy to get wrapped up in it and want to tweak things immediately. Keep in mind that people will give you feedback based off of their market knowledge and domain experience — it is your job to apply that knowledge to your company without losing sight of your vision." — Allison Beal, Co-Founder & CEO, StyleSaint
12. Not Having the Right Co-Founder
"Starting a business is a lot like falling in love. At first, we tend to see the business and our partners at their best, full of promise, and can't conceive that they will ever be anything but their best. But as in any relationship, eventually their flaws and their failings are clearly exposed. What I have learned is that we need to do a thorough SWOT analysis not only on the market opportunity, but also on our partners. Some faults we can accommodate, but sometimes our partners' weaknesses in combination with our own constitute a deadly cocktail. A key aspect of our personal due diligence is then is assessing our partners, particularly learning how they react under stress." — Whitney Johnson, Co-Founder, Rose Park Advisors
"Your early partners, co-founders, investors and hires are crucial to get right. While the ideal partner balances you or brings skills to the table you don't have, the most important thing to look for is alignment of values. Do you fundamentally want similar things out of this endeavor? Are you willing to take more or less the same amount of risk? Are you comfortable with your prospective partner's ethics and moral decision-making? I've seen the last one in particular cause a lot of heartbreak in early-stage companies." — Kathryn Minshew, Founder/CEO, The Muse
13. Trying to Win Over Everyone
"Among the biggest mistakes I made when fundraising early on was trying to turn every nonbeliever into a diehard fan, working to convince everyone who pushed back that they were wrong about Greatist and about the space. What I quickly learned was that it was more productive to find the investors who already believed, who were already my fans, and capitalize on the potential for them to become my biggest champions. I think a lot of new entrepreneurs face situations like this, and the quicker that realization comes, the easier the fundraising process can be." — Derek Flanzraich, Founder & CEO, Greatist
14. Not Listening to Current (or Future) Customers
"One of the common mistakes young startups make is developing a product without enough input. As much as you're executing on your vision and keeping things under wraps until launch, engaging potential customers early — even when it's just a twinkle in the eye—- can help put you on the right path. It also helps validate the demand for your product. Others can help provide feedback on your differentiation or competition. The fact of the matter is, as a startup, you're extremely strapped for time and resources. So, it's that much more important to try to get close to the target around product-market fit and iterate from there. At Kiwi Crate, we spent quite a bit of time working with parents and kids to develop our product. Even today, we have kids come into our offices at least once a week to help test what we're doing. It's been invaluable for us." — Sandra Oh Lin, Founder/CEO, Kiwi Crate
"Young startups can fall so deeply in love with their idea, they aren't open to tweeks in the business. If you never get product-market fit, you'll never really have a company (or you'll struggle the whole time)." — Nicole Glaros, Managing Director, Techstars
15. Jumping to Decisions
"Don't hire someone till you have interviewed at least ten people for that position. Don't fall in love with anything, and stay objective. Get to know potential co-founders quite well before bringing them on to the team. In all the times I've seen companies fall apart due to co-founder issues, it was in young founders who didn't clearly specify roles and expectations and really didn't get to know each other." — Jay Levy, Co-Founder, Zelkova Ventures and Uproot Wines
16. Not Maintaining Relationships
"Be consistent in your outreach with mentors and other key connectors in your network. Set a schedule for yourself and stick with it, whether it's weekly for your inner circle, quarterly for acquaintances, or somewhere in between. Every time you consider putting off one of those updates, think about the headache of starting off an email with, 'It's been too long since we've caught up!' and the effort it takes to re-build that relationship." — Ally Downey, Co-Founder, WeeSpring
Sunday, April 14, 2013
The Do's and Don'ts of Cash Management
Working capital is a highly effective barometer of a company's operational and financial efficiency and effectiveness. The better its condition, the better placed the company is to focus on developing its core business.
The early, primitive attempts at maximizing cash management can be traced back to the late 1970s. Unbelievably, there are still some companies who haven't yet understood that putting cash trapped in the balance sheet to better use can give them a competitive edge over their rivals.
A most recent report shows a further reduction of working capital in companies in the US and Europe compared with the previous year, of between 3 per cent and 5 per cent. This demonstrates the continuing increase in the importance of working capital management to help companies achieve their strategic objectives.
How to do It
There is more to working capital management than simply telling a company to collect its debtors as quickly as possible, to delay paying its suppliers as long as possible, and to keep stock levels as low as possible. A properly conceived and executed improvement program will certainly focus on optimizing each of these components, but will deliver additional benefits that extend far beyond the merely operational. It will demonstrate the need for ambitious corporates to integrate working capital management into their strategic and tactical thinking, rather than view it as an optional bolt-on extra.
There are a number of dos and don'ts to help guide corporate thinking. Firstly, do think of working capital management as a strategic objective that can enable your corporation's goals. We cannot over-emphasize this opening point. The same factors that drive a company's working capital also drive its operating costs and customer service performance. Therefore, by addressing the drivers of working capital a company will also experience significant improvement in operating costs and customer service.
For example, a company's working capital is deteriorating due to an increase in past due accounts receivable (AR). A review of the overdue AR illustrates a high level of customer disputes. The disputes are taking on average 30 days to resolve and consuming significant amounts of sales, order entry, and cash collectors' time. By tackling the root cause of the disputes, in this case poor adherence to pricing policies, the company can eliminate the disputes, thereby improving customer service.
This will free up the time of staff in sales, order entry and cash collections, enabling them to be more effective at their designated roles. This in turn increases productivity, reduces operating costs, and potentially increases sales. Working capital will improve, as customers will have fewer reasons to hold payment. This example illustrates how working capital is one of the best indicators of underlying inefficiency within an organization.
Consider Another Perspective
Don't think of things only from your own company's perspective. If you can help your own customers plan their inventory requirements more efficiently, for instance, you can match your production to their consumption, efficiently and cost-effectively, and do the same with your own suppliers. The potential implications for inventory levels are huge. By aligning ordering production and distribution processes, you increase inherent efficiency and achieve direct cost savings almost instantly, as a by-product. And then you discuss the best way to bill or to pay.
Do educate your organization to consider the trade-offs between different working capital assets when negotiating with customers and suppliers. Depending on the usage pattern of a raw material, there may be more to gain from negotiating consignment stock with a supplier versus pushing for extended terms. This could apply particularly in cases of long lead-time items, or those that require high minimum order quantities.
Agree Formal Terms
Do agree formal terms with suppliers and customers and document those terms carefully. Keep them up to date, and communicate those payment terms to employees throughout your business, particularly those involved in the customer to cash and purchase to pay processes, including your sales organization.
Don't allow prolific new product introduction without a clear product range management strategy. Poor product range management creates inefficiency in the supply chain, as companies are required to support old products with inventory and manufacturing capability. This increases operating costs and exposes the company to an obsolete inventory that may have to be disposed of.
Collect your Cash
Don't forget to collect your cash. Many businesses fail to implement effective ongoing collection procedures to prevent excess overdue funds or build-up of old debtors. Ask customers if invoices have been received and are clear to pay. If not, identify the problems that are preventing timely payment.
Confirm and reconfirm the credit terms agreed upon with the customer. Often, credit terms get lost in the translation of general payment terms and what's on the payables ledger in front of the payables clerk. Do devote the requisite amount of time and attention to the critical issue of dispute management.
Don't set top-down targets uniformly across the business. For instance, too many companies impose a 10 per cent reduction in working capital for each division. This fails to take into account the potential opportunity within a division and can result in setting an impossible target that acts to de-motivate. Instead, balance top-down with bottom-up intelligence when setting targets.
Targets Drive Behaviour
Do set targets that drive the desired behaviour. Many companies will incentivise collections staff to minimize the aged AR over 60 days. Does this mean that customers who pay one to 60 days late are good payers? No, aged AR over 60 days will result in increased costs and time it takes to collect the debt. By incentivising staff to lower the amount over 60 days, you keep your costs down. Do educate staff, customers and suppliers that cash and cash management are important, and are an integral part of a successful business relationship.
Look Within Yourself
Don't assume that all the answers are to be found externally. Before approaching existing customers and suppliers to discuss cash management goals, fully understand your own process gaps so you can credibly discuss poor payment processes.
Do treat suppliers as you would like your customers to treat you. Far greater cash flow benefits can be realized by strategically leveraging the relationship you have with suppliers and customers. In addition, a supplier is more likely to support you in an emergency if you have treated them fairly.
Don't however, treat everyone the same. Use segmentation tactics to split your customer supplier into similar groups. This may be based on a basket of criteria including profitability, sales, AR size, past due debt, average order size and frequency. Define strategies for each segment based around the criteria and your strategic goals.
Do celebrate success in hitting targets. Emphasise the actions that helped you get there.
Conclusion
To summarise briefly, following the dos and don'ts will enable you to optimize cash and to highlight inefficiencies in your processes that must be remedied to better serve customers. It will enable you to build stronger partnerships with your suppliers across the total working capital value chain. This translates ultimately into improvement in bottom-line results, often a good deal quicker than you might expect, and helps clarify the senior management focus on strategic imperatives.
Author Bio
REL Consultancy Group www.relconsult.com are global specialists in generating cash improvements, cost reductions and service enhancements by optimizing working capital. They are the only international corporate financial consulting firm that focuses exclusively on increasing operational efficiency from working capital and operations. They work with people to transform your organization, your customer's and your suppliers in more than 60 countries around the world.
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