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Our Articles
January 2009
Cash Management in Trying Economic Times – A Survival
Guide for Management
By Matthias Strilbyckij, CPA, CFE, principal of Konowitz, Kahn & Company, P.C.
In prosperous times, cash flows in and accounts receivables aren’t much of a concern to a
business owner. But, in tough times like these, every penny counts, since fewer are
flowing in. Like sealing the doors of a dam at the mouth of a great river, the flow of vital
resources can be cut to a trickle very rapidly, affecting everything and everyone that
depends on it for its livelihood. In business, cash is that vital resource. Businesses are
currently facing many challenges with the severe credit crisis, an economy in recession,
slumping sales, bankruptcies, and ever-rising costs of health care and fuel. Managers
more than ever must cope with cash management issues and enact survival strategies to
stay afloat.
As revealed in a recent survey1 by CFO Research of mid-sized U.S. companies, the
recent economic crisis has tipped finance executives’ priorities in favor of aggressively
managing cash flow to stay in business. Their top priority now is “improving working
capital processes and forecasting cash flow.”
Managers must focus their attention on the working capital requirements of their business
during difficult economic periods. This requires managers to use the proven survival
techniques provided by cash management strategies.
There are many recent examples of how poorly managed cash flow determines a
company’s demise. Consider the sobering statistic that sixty percent of business start-ups
fail within the first six months primarily due to lack of cash flow and
undercapitalization.2
According to CEO Robert Nardelli, Chrysler is attempting to reduce its debt “to levels
that can be adequately supported by the company’s ongoing cash flow capabilities.” 3
How can financial managers navigate today’s looming business challenges and preserve
cash flow and ultimately sustain the business? The immediate answer lies in cash
management strategies.
References:
1 CFO Research Services Report, “No Stone Unturned: Strategies for Cash Management in Hard Times,”
CFO Publishing Corp., November 2008.
2 Bonita L. Richter, “Starting a Business - 10 Reasons Why Small Businesses Fail to Thrive,”
Articlesbase.com, 10/03/2008.
3 Mike Ramsey, “Chrysler Hosts Fiat Chief, Details Restructuring Plan,” Bloomberg.com, January 27,
2009.
Cash Management Forecasting
Managers must choose which cash management tools make sense for them during this
challenging economic time. The first step to cash management is to prepare cash flow
forecasts. Cash flow forecasts use business models which estimate cash inflows and
cash outflows for a future period of time.
Forecasting business cash flow is essential for proper cash management. This financial
tool gives managers critical information to anticipate and resolve cash problems and take
actions to accelerate cash inflows and delay cash outflows.
Cash forecasting allows a manager to consider the best information available to project
cash receipts and cash disbursements in order to compute the company’s projected cash
balance or shortfall. A cash forecast should be updated regularly to maintain its accuracy
and relevance. This is vital since managers need to know if their cash management
strategies are functioning.
Methodologies of cash forecasting for projecting cash receipts and cash disbursements
range from using sophisticated modeling software to modifying a company’s budget.
Whatever methodology a company uses, the cash forecast must provide the following:
1. Predictive accuracy – the information used should provide a reliable forecast of future
cash balances.
2. Feedback – the forecast should provide information that managers’ strategies are
working.
3. Relevancy – the forecast should be updated regularly for changes occurring in the
business.
Cash Inflows and Outflows
Accelerating cash inflows to optimize cash balance is a cash management tool which
includes the following techniques:
1. Improving billing operations (get bills out sooner).
2. Improving collections from slow-paying customers.
3. Reviewing customer credit policies (e.g., shortening the period when payment is
required, if possible).
4. Selling non-performing and/or unused assets.
5. Selling short-term investments.
6. Sale and lease back of property, plant, and equipment.
7. Using lock boxes.
Delaying cash outflows is a cash management tool designed to preserve cash. Managers
achieve this by implementing the following processes:
1. Properly timing accounts payable payments, negotiating payment terms with
suppliers, and stretching out payments through progress payments or partial
payments.
2. Securing purchase discounts when payment terms are non-negotiable.
3. Negotiating payment terms with banks, secure lines of credit that provide cash during
periods of cash shortfalls, convert short-term financing to long-term financing, if
possible.
4. Exercising control over inventory, using a just-in-time (JIT) inventory strategy. JIT
reduces costs by reducing raw material requirements and producing products based
on customer orders.
5. Reducing general and administrative expenses (e.g., review insurance, pension, lease,
and telephone expenses).
6. Investing in technology to gain efficiency and reduce costs.
7. Reviewing outsourcing options to reduce expenses.
8. Delaying major capital expenditures.
A Matter of Survival
To survive these challenging economic times, managers must make cash management
their top priority. They must be careful and utilize cash management techniques that
allow them to optimize cash flows that match their cash requirements.
Today, managers cannot rely on growth strategies to improve cash flows. In difficult
economic times, they must employ cash management strategies that accelerate accounts
receivable, improve collections, control costs, aggressively manage inventory, secure
lines of credit, and negotiate favorable credit terms with banks. By implementing these
cash management strategies, companies can expect to keep cash flowing throughout
turbulent times and this recession.
Additional Reference:
William Behrenfeld, Sidney Kess, Andrew Biebl, Barbara Weltman, The Accountant’s
Business Manual, (New York: Prentice Cohen, 2008).
About the Author
Matthias Strilbyckij, CPA and principal of the public accounting and business advisory
firm of Konowitz, Kahn & Company, P.C., oversees quality control for the firm's
auditing and accounting engagements. He is a member of the Connecticut Society of
CPA’s.
A Certified Forensic Examiner (CFE), Matt is on the team of The KK&Co. Financial
Investigation Services Group, a division of Konowitz, Kahn & Company P.C. His
specialty areas include Employee Benefit Plan and Burden Fringe and Overhead audits
and Lean manufacturing and production practices.
Matt is a member of the American Institute of Certified Public Accountants (AICPA) and
Connecticut Society of Certified Public Accountants (CSCPA). He earned his Bachelor
of Science degree from Iowa State University and his Master's in Business
Administration from the University of New Haven.
Among his many community involvements, Matt is on the Board of Directors for Tabor
Community Arts, in Branford, and the Advisory Board for the Children's Home, in
Cromwell.
Matt can be reached at Konowitz, Kahn & Company, P.C. at 203-239-6888, and by email.
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