Install rigorous controls with your PMs when it comes to the average collection period, and watch the money flow back into your accounts.
As 2016 fades into the past and we prepare the year-end analysis, one of the most important New Year’s resolutions that all CFO, controllers, and financial managers need to stress to senior leadership and the project management teams is cash flow optimization. An example of a firm that really took our suggestions to heart illustrates how important optimizing cash flow can be and how valuable it became.
We were engaged in early 2016 by the CEO and COO of a firm that’s doing $18 million gross revenue, but had serious cash flow issues. Their AR was $4 million, and the “over 61 days” was at $2.2 million. They had less than $400,000 in the bank. The firm’s average collection period was more than 110 days.
They had 57 project managers who didn’t seem to understand that part of their job was to ensure adherence by clients to contract terms.
We started by instituting weekly AR reviews on all 57 PMs, and insisted that comments on when they would see cash inflows and how much was coming were entered into the Deltek Vision accounts receivable system. We instituted weekly cash flow reviews projected out 26 weeks.
By August, the controller was not embracing the program and a replacement was made with a highly dynamic and experienced controller, who came from a larger firm and was clearly looking to modify the project managers’ behavior.
By November, the firm still had AR of $4 million, the “over 61 days” was at $300,000, they had $2.2 million in the bank, and the ACP was at 53 days!
The program we integrated worked due to the fact that the CEO and COO were 100 percent behind the program, and the results dramatically proved what happens when financial management works with project management to effect positive change.
The following are recommendations to get your firm in a cash flow optimization mindset:
- Adherence to contract terms. Getting the financial management team to hold the clients to performance of contract terms is critical. They can only be effective up to the terms of the agreement. When the client stops paying beyond contract terms, it is first up to the PM to determine where the problem is. If they can’t get resolution within two days, it needs to move into the hands of the project principal.
- Is the right person in the role of controller? Guiding the financial direction of a firm requires the controller to be a strong-willed, effective professional that stresses process, procedure, and adherence to the terms of agreement. In our firm’s example, the controller would not challenge the technical staff, and did not hold them to the commitments they were providing. The controller has to ensure that the project management team is diligent with the client and has to be the gatekeeper to provide effective cash management.
- Weekly AR review. This firm recognized that reviewing the project managers on a weekly basis put everyone on notice of the issues. Project principals were held accountable for the performance of their project managers. The project management accountant was rigorous about providing not just a weekly analysis of the AR but of sorting the AR by PM from high AR to low. The project managers could no longer hide.
- Monthly work in progress review. Monthly review of the WIP was instituted and not only was WIP reviewed at the gross level on the balance sheet, but just like the AR, the WIP was aged monthly and then sorted from high to low to see where the issues were with the project managers. WIP, uncontrolled, becomes a cash flow killer.
- Weekly cash flow review. Integration of a weekly cash flow review that provided a predictive look 26 weeks out proved invaluable in allowing the new controller to target the outflows with real data that supported the cash inflows. By marrying anticipated AR with the projected, the report and data became highly valuable. With the bank balance increasing, the timing of the cash outflows became much more strategic in nature and the ability to broadcast accurate, predictive information to senior management took much of the worry away. The controller and the financial management team were proud of the way they supported the project managers, and ultimately, the project managers saw how valuable this was to the firm.
- Monthly metric review and simple reporting. Streamlining the monthly reporting to effectively a one page review of vertical office and horizontal lines of business performance at a profit and loss level created a clear understanding of the information. Critical metrics were reviewed for each office and the lines of business, and the starting point in this firm’s case was office/firm ACP. Other metrics such as effective multiplier, revenue factor, breakeven multiplier and operating multipliers, average payment period, and a few others, all assisted in streamlining the information. Now, instead of sifting through a 20-page report, the starting point was the one-page review. If the office or a line of business required a deeper dive, the information was provided. The most critical aspect of this reporting was an effective qualitative assessment by the new controller on areas that needed attention. The delivery of the information was also accelerated from seeing the reporting on the 20th of the month to the 10th of the month.
- Sounds simple, not easy. What the firm went through sounds like an easy program, but it wasn’t easy. The realignment of the 57 project managers’ responsibilities, the replacement of the controller, the review process, reporting process, and insistence on performance took some time to take hold. However, for this firm, there is no going back. There is a clear understanding by the PMs of why holding the client to the terms of agreement is critical. They changed their cashflow picture by putting their hard-earned money in the bank rather than leaving it in the clients’ hands.
Ted Maziejka is a Zweig Group financial and management consultant. Contact him at firstname.lastname@example.org.