Don’t pass the buck – create competitive advantage
Last week I read an article in the FT about how the CFO will face turbulent times in the near future, and how important cash flow forecasting and cash management have become in the credit crisis. Although this was a very insightful article, there was one fundamental issue that troubled me.
In the ‘checklist for staying prosperous in troubled times’, it is quite rightly suggested that all staff should be focused on cash, but it also suggests that you should ’press customers to pay quickly and take longer to pay your suppliers’.
I find this a typical knee jerk reaction that in the best case scenario may only have some short term benefits. After all, one company’s payables is another company’s receivables. So if one company takes longer to pay, the other company will get paid later - what one company benefits from, the other company loses. This is a measure that should only be used as a last resort.
Times of crisis present opportunities for change. Firms should look elsewhere for new sources of cash and not just try to pass the buck.
Companies that are in relatively good health can now use this credit crisis to their advantage by thinking differently.
By raising cash from the banks or the capital markets and using this cash to pay vendors early and give clients better payment conditions, you strengthen your negotiation position. You basically use the new power to improve vendors’ or clients’ cash flow as a way to differentiate yourself and to create a competitive advantage.
You may choose to use it to achieve better prices or increase market share, and at the same time also tie your vendors and clients closer to you and create loyalty.
This of course presupposes that the company is in a position to borrow in the first place. However, if a firm has already in the booming years exhausted its ability to borrow, unfortunately it won’t be able to take advantage of this opportunity, as I commented on a few weeks ago.
