P
ayables priorities in many companies are set by cate- gories. Typical top-priority payables are fixed expenses such as payroll and occupancy items. Second-priority payables usually consist of regular vendors of critical services.Also in this category are primary suppliers whose flow of mate- rial or services is essential to your ability to meet your cus- tomers’ delivery schedules.
Policing payables is really just basic good sense. It consists of instituting a set of practices to ensure the matching of your doc- umentation through the system. Purchase orders and shipping documents need to be compared with the invoice. Quantities billed need to be dou- ble-checked against receipts; and ancillary items such as delivery charges or sales taxes should be reviewed at least periodically.
Aging is usually associated primarily with accounts receivable, but it is impor- tant with accounts payable as well. Sort and list your payables in age groupings of 30, 60 and 90 days. This will give you a simple, but direct, early warning of possi- ble cash-flow problems, as well as a heads-up on possible sources of liens about to be filed.
A concept closely related to accounts payable is accrued expense, which is often associated with costs found under SG&A. This category is for expenses already incurred but not yet paid for. You have gotten the value but have not yet paid the provider of the service. Taxes of various sorts, such as pay- roll taxes, can be significant here. So, too, can utilities, com- missions and a wide range of other costs, including interest.
The main point, of course, is that whether we’re speaking of payables or accrued expenses, what we have, in effect, is an interest-free loan in those amounts.
The practice in many enterprises is to pay down the payable and accrual amounts quickly when cash flow is strong and then stretch them out when cash gets thin. This may help share the good times with suppliers and also enable you to take advantage of special discounts for prompt payment. A better
Policing payables is
really just basic good
sense. It consists of
instituting a set of
practices to ensure
the matching of
your documentation
through the system.
approach, however, may be to be as consistent as possible with suppliers. That way you will neither confuse them with uneven behavior nor create expectations that may be frustrated later as you encounter changed circumstances.
The discussion about the cash driver known as accounts- receivable days noted the need to educate customers, especially new customers, about your expectations on payment. A similar process often takes place going the other way. Many companies begin to test supplier expectations by paying at the latest possi- ble time within the allowable terms at first, then progressively extending just one more day each month until the supplier’s attention is elicited. In practical terms this
may be as simple a process as keeping the checks in the desk drawer one extra day before mailing them to suppliers. The next month it is two days in the drawer, and so forth, until the limits of acceptabil- ity for each supplier are reasonably well defined. There is, however, an ethical problem here as well as the practical one of keeping track of how long you can
delay each supplier. The ethical problem, of course, is that the transaction was entered into based on an agreement on terms;
business needs to honor that trust function, not abuse it. And if you take as much rope as the supplier permits, there may well be no slack left for those times when you might really need to extend payment.
In fact, for each cash driver, there is the question of leaving a little slack in the system. If every item is always pushed to the limit, then the tension of the system can make it difficult to absorb the ordinary shocks that circumstances inevitably deal to a business. So, for example, if all of your swing factors are always tuned to their highest state of efficiency, and if that state becomes your normal one, then what room for adjustment is left for responding to cash-flow crises as they come along? A final note on the swing factors, therefore, is to remember that if the fundamentals (gross margins and SG&A) of the business are deteriorating, the swing factors can usually be tightened up a bit to create some cash breathing space while you try to get the fun-
If you take as much
rope as the supplier
permits, there may
well be no slack left
for those times when
you might really need
to extend payment.
damentals back on track. The fundamentals, though, are fun- damental and you will have only a very finite opportunity to correct them.
We have now covered issues of sales growth, the funda- mentals and the swing factors. It is time to turn to capital expenditures (Capex) where we do so much of our resource planning for the future.
HE THINGS THAT COME MOST READILY TO MIND
when we think about capital expenditures (Capex) are land, buildings, machinery and equipment. Offices, stores, warehouses and fac- tories are clearly major elements. Production, shipping, computing and other hardware items are still anoth- er. With the exception of land, all of these are depreciable assets; you don’t account for their cost as an expense when you acquire them, but rather you depreciate them over their useful life, taking a fraction of the original expenditure as an expense to be allocated in each accounting period.
Publicly traded companies produce cash-flow statements that show depreciation and capital expenditures, but many small and medium-size companies do not. (By the time you’ve reached this part of the book, though, I hope you are con- vinced your company should be using this statement.) In the absence of a cash-flow statement, you’ll have to determine actu- al capital expenditures on your own by referring to the balance sheets and income statement. The procedure, fortunately, is quite simple.
To calculate net capital expenditures, take the sum of depreciation and amortization expenses from the income state-