Ideal situation is to balance both payables and receivables

Ideal situation is to balance both payables and receivables

An interview with Natarajan. R, chief operating officer and chief financial officer of Helion Advisors, a venture capital firm, on the importance of maintaining a healthy cash flow

Natarajan. R, Chief Operating Officer & Chief Financial Officer Helion Advisors, a Venture Capital Firm

Cash is king. And companies need to maintain a healthy cash flow whether it is to run their day-to-day operations smoothly without a liquidity crunch, or for a strategic long-term growth plan like funding expansion during tough times. While the fine print of managing one’s cash flow is company and sector specific, in this interview with Poornima Kavlekar of The Smart CEO, Natarajan. R, chief operating officer and chief financial officer of Helion Advisors Private Limited, gives a broad outline on what companies can do right to maintain a healthy cash flow.

Maintaining a healthy cash flow is important for running a small business or any business for that matter. What would be your advice to entrepreneurs on maintaining healthy cash flows?

I think the company should have simple financial discipline, which will ensure healthy cash flow. This is advice at a macro level. Depending upon the stage of the company and the sector in which it operates, various structures can be put in place to monitor healthy cash flow for each company. For example, if it is a consumer business, it is easy to track cash collection on a daily basis and your focus should be on inventory. Ideally, you may like to negotiate the supplier credit period and very low inventory in such a way that there is a negative working capital business here. If it is a services business, then try to negotiate some advance from the customers, if possible. If not, do a more frequent billing (if it is a T&M billing, bill once in 15 days or if it is a milestone billing, negotiate shorter milestones) to get cash faster.

How does one ensure that their accounts receivable and payable policy is airtight enough to help in better cash flow management? Any key trends that are emerging in this area?

The ideal situation is to balance both payables and receivables. This means that you pay to your suppliers after collecting from your customers. The only exception could be the salaries and office expenses. If that is not possible, we should get the benchmark from competition specific to the company about the days sales outstanding (DSO) for receivables and negotiate with the customers and suppliers, accordingly.

There are several options on working capital finance. You can try the bill discounting method. Here, one would get the customers to accept bills and discount in their limits, factoring and supplier bill discounting. Negotiate supplier bill discounting at their limits, if possible. You also need to have strict collection policies. For example, if there is an overdue by a customer, next supply should not go. Typically, the sales team will shy away from collection. We need to link sales incentives to collection rather than sales.

How should the CEO and CFO work together to improve the quality of planning and forecasting (be it for hiring purposes or inventory planning)?

Both the CEO and CFO have to be very coherent with each other. For example, I know there will be a monthly forecasting meeting and the CFO presents to the management team, the impact of cash flow for holding large inventory or keeping people (in a services business) in anticipation of the order. Depending upon the intensity of the issue, you may hold meetings on a weekly basis too. It is very important to involve the CFO in these business decisions.

What strategies should manufacturing companies adopt when it comes to inventory management?

Ideally, make sure that your net working capital is negative. This means that you do not hold stocks unnecessarily. Also, work closely with your suppliers and keep the stocks in their godown. Maruti Suzuki did the same thing. The company kept its inventory at the supplier’s godown.

How does a company survive cash shortfalls?

This is not a good situation. I suggest the company should pay off supplier credits, bank working capital lines, use customer advance and promoter loans (in this order).

What should a startup company’s software implementation strategy be? Does this help in managing cash flows better?

Yes, companies should invest in such a manner that their information systems are strong. This does not mean a startup company should do SAP for accounting. But, as long as it has information to act upon to manage business, that is fine. Do not waste money. In a startup, try and do as much as possible with a SaaS model so that you pay per use.

Poornima Kavlekar has been associated with The Smart CEO since the time of launch and is the Consulting Editor of the magazine. She has been writing for almost 20 years on a cross section of topics including stocks and personal finance and now, on entrepreneurship and growth enterprises. She is a trained Yoga Teacher, an avid endurance Cyclist and a Veena player.