Cash is back in fashion, but is it here to stay?
According to this KPMGs survey of 350 CFOs in the US, UK and Europe, cash management is the number one priority for more than a quarter of the respondents (28 percent), while a further 58 percent describe it as one of the top priorities for the business as a whole.
We are living in times of change, and some issues will be harder to face than others. As an economy we have had a wakeup call and companies need to respond to the changes that are taking place. In my personal opinion, the economy has a long way to go before we see light at the end of the tunnel. The debt mountain is spiralling and we know whatever government takes control at the next general election hard decisions will need to be taken, and only time will tell if the correct course of action has shortened or lengthened the downturn.
Real GDP in the UK economy during 2009 Q3 declined by 0.2% which means that Britain has officially been in recession for 18 months – the longest period since records began in 1955. GDP is now 5.2 per cent lower than the third quarter of 2008. In November 2009 the public sector net debt (PSND) increased to £844.5bn, equivalent to 60.2% of gross domestic product and equivalent to ~ £33,512 per household
The Policy Exchange says most people are aware that Britain has a huge national debt which is growing during the current fiscal crisis. But what many people do not know is that we have a second national debt – one that is kept out of government figures and hidden from view. This is the public sector pension debt, which has grown as successive governments have continued to promise public sector workers defined benefit pensions, often worth two thirds of final salary, index-linked for life. It is now equivalent to 78% of GDP (£1.1trillion) with the cost of servicing the debt each year to pay for these unfunded schemes now at £45.2 billion (Creditaction).
There were 4,716 compulsory liquidations and creditors’ voluntary liquidations in total in England and Wales in the third quarter of 2009 (on a seasonally adjusted basis). This was an increase of 14.6% on the same period a year ago. Companies must embrace change if they are to survive this year, let alone the next.
I strongly believe Credit Management is the key to sustainable long term prosperity and companies must understand Credit Management or get specialist help. Let’s not kid ourselves by having Andrew or Jane sitting in the back office chasing payments is all Credit Management’s about. Credit Management has a wider remit than just chasing invoice payments.
Credit Management includes managing long term relationships with clients and supporting the sales and marketing teams. Only by understanding this wider remit will company cash flow be improved and strong client relationships forged.
The costs incurred/investment made in extending trade credit include:
- Additional administrative expenses.
- The cost of carrying accounts receivable, the time and opportunity value of cash on hand.
- Bad debt losses from customers’ failure to pay.
So what is the greatest source of return from this investment in trade credit?
The obvious answer would be more and larger profitable new and repeat sales while controlling losses. The less obvious answer is the support that the credit function can and should provide to customer service/retention, purchasing, marketing and sales efforts and to new levels of efficiency throughout the entire business chain of suppliers and customers. Over the long term it is this last contribution of the credit function that may prove the most valuable.
Please take time out to read the attached (.pdf 400kB) document by KPMG, titled: Cash is back in fashion, but is it here to stay?