Posted by Steve Wilcox on Fri, Jul 17, 2009 @ 10:42 AM
There is a liquidity squeeze brewing.
Banks just don't want to lend.
Maintaining access to capital -- short and long term loans, revolving lines of credit, etc -- has become costlier and more difficult to come by as lenders have become much more cautious and stingier. The length and size of debt commitments are shrinking while costs are rising.
Higher capital requirements have made banks less willing to lend. In fact, banks are exacerbating the liquidity crisis by pulling in loans for borrowers who have defaulted on covenants ... and as earnings weaken, more and more companies are violating loan covenants. Banks are using these covenant violations to reprice debt packages. The harsh reality is that as more covenants get tripped, companies are being forced to renegotiate terms and those terms are unfavorable. Debt covenants are more stringent, terms shorter, interest rates higher, collateral requirements higher and banking fees higher.
Here is a graph showing the spike in covenant amendments:
The bottomline is that you don't want to be in default of a covenant as banks are going to extract more than a pound of flesh in exchange for continued access to that credit.
You also want to have visibility if a covenant is close to being tripped so that you can take proactive measures. If you are not in a position to fund operating expenses through working capital improvements alone, maintaining access to credit is a critical issue.
How does AP fit into this picture?
On the margin, AP may be able to make a difference on whether a loan covenant is tripped or not.
What is a Covenant ?
Briefly, a covenant is a condition that the borrower must comply with in order to maintain a loan or line of credit. If the borrower violates the condition, the loan can be considered in default and the lender has the right to demand payment (usually in full).
Obviously, banks add covenants to debt agreements to maintain loan quality, ensure the company has adequate cash flow to repay and keep an up-to-date picture of the borrower's financial health.
Common covenants include maintaining certain insurance policies (e.g. hazard, key-man life), submission of financial statements on a monthly, quarterly or yearly basis, and minimum financial ratios.
Most covenant violations are related to financial ratios falling below minimum thresholds. Financial ratios measure many things (some are very arcane!) but typically include:
- Minimum quick and current ratios (liquidity)
- Minimum Return on Assets and Return on Equity ratios (profitability)
- Minimum equity, minimum working capital and maximum debt to worth ratios(leverage)
How can AP make a Difference?
AP can definitely make a difference if a company is close to violating a covenant. Let's work through a couple of examples.
A typical liquidity ratio is the current ratio. The current ratio is an indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is.
| Current Assets |
= Current Ratio |
 |
| Current Liabilities |
If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations. For example, if ABC Company's total current assets are $10,000,000, and its total current liabilities are $5,000,000, then its current ratio would be $10,000,000 divided by $5,000,000, which is equal to 2. ABC Company would generally be considered to be in good short-term financial standing.
So how can AP help here? If you have confidence in your ability to pay bills quickly to take discounts you can reduce your current liabilities to improve the ratio. Conversely, if you are late paying bills with late payment penalties, your current liabilities will increase which will decrease the ratio (make it worse).
Another typical ratio is Return on Assets (ROA).
| Net Profit after Taxes |
= Return on Assets (ROA) |
|
| Total Assets |
ROA is an important gauge of a company's profitability. It provides insight into how efficiently a company is being run by management and their ability to generate profits from the assets available to the company.
Anything a company can do to reduce costs within AP goes directly to the bottom line, improving profitability and thus positively affecting the ROA ratio. In addition to the obvious productivity benefits, automating AP processes can also reduce operational costs:
- Storage: Less paper means reduced storage costs and the ability to manage storage and archiving requirements. Less storage also means more efficient use of office space.
- Office supplies: Reduced requirements for file cabinets, file folders etc.
- Document transport: Average two thirds reduction in annual shipping and postage costs
- Disaster recovery: Disaster and business continuity processes are simplified and less risky
- Auditing: A single, automated process is easier to audit and has lower internal and external (e.g. SOX) audit costs. In addition, audit documentation requests take less time as these requests can be handled in a self-service fashion.
In summary, we are in the midst of a liquidity crises. Existing access to capital should be preserved and the key here is NOT to violate covenants. For certain covenants, automating AP can provide the visibility and make the difference between whether a loan is in default or not. In this environment where cash is king, that is a huge strategic benefit.
-Rakesh Shukla
@rakesh170
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Posted by Rakesh Shukla on Fri, May 01, 2009 @ 11:34 AM
My boys won the New England Super Regional AAU Tournament this past weekend. Even though it's only a 12-year-old basketball tournament, it's a major accomplishment.
When you consider that we have been practicing together for only a month and soundly defeated several teams who have been playing together for years (including a team that placed 5th at Nationals last year), the significance of this accomplishment is only magnified.
What shocked me more than winning, though, was the dirty play against my boys in the Final Four game ... the trash-talking profanity was non-stop and extremely vulgar ....... chippy guards were kicking my son in the back of the knees and tripping him whenever the referees turned their heads ....and ... you won't believe this one ... another one of my kids was punched in the stomach when the refs were not looking.
This was not basketball. It was violence meant to intimidate my boys. But my boys played through it and showed some real mental & physical toughness.
The other disburbing aspect of winning was the lack of graciousness from my fellow coaches ... many were downright jealous. "How dare a a newly-formed suburban team with an unknown coach win the Division 1 Super Regional Championship???"
In fact, one of the other coaches/teams was so envious, that an informal complaint was filed that I was cheating! He claimed that my kids were too old.
Thank goodness I had all my birth certificates and other paperwork in meticulous order. I had collected and prepared everything in a neatly organized binder weeks ago whereas most other teams were scrambling at the last moment with scraps of paper here and scraps of paper there.
Which brings me to my point about disputes and protests ...
... WHOEVER HAS THE BEST DOCUMENTATION WINS.
Think about what this means for AP disputes. If all information, including all related documents and audit trails is available online, not only will there be fewer disputes but the disputes that do happen will get resolved more quickly.
Some studies have shown that AP can spend up to 20-25% of their time dealing with supplier disputes and inquiries. What a productivity drain! Having all documentation online will solve this problem quickly.
I learned many things this past weekend -- maintaining the best documentation possible to help resolve disputes in your favor was one of the biggest lessons learned.
-Rakesh Shukla
Posted by Rakesh Shukla on Mon, Oct 13, 2008 @ 06:50 PM
"
Laws are like sausages, it is better not to see them being made."
Otto von Bismarck
How true ... especially after watching the passage of the Wall St. Bailout bill. The bill had some very weird provisions. Here is my favorite:
SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.
(a) IN GENERAL.-Paragraph (2) of section 4161(b) is amended by redesignating subparagraph (B) as sub301 paragraph (C) and by inserting after subparagraph (A) the following new subparagraph:
‘‘(B) EXEMPTION FOR CERTAIN WOODEN ARROW SHAFTS.-Subparagraph (A) shall not apply to any shaft consisting of all natural wood with no laminations or artificial means of enhancing the spine of such shaft (whether sold separately or incorporated as part of a finished or unfinished product) of a type used in the manufacture of any arrow which after its assembly-
‘‘(i) measures 5⁄16 of an inch or less in diameter, and
‘‘(ii) is not suitable for use with a bow described in paragraph (1)(A).''.
(b) EFFECTIVE DATE.-The amendments made by this section shall apply to shafts first sold after the date of enactment of this Act.
What wooden arrows for children have to do with solving our current credit crisis is beyond me. As I read the full text of the bill (yes, I actually read most of it), I was kinda shocked at the inclusion of some other unrelated tax breaks (i.e. pork) benefitting Hollywood producers, stock-car racetrack owners and Virgin Islands rum-makers.
I guess this is how a bill is passed ... a big pot of pork sausage is Washington's recipe for final passage.
When it comes to bills, Washington is not the only place for dysfunctional processes. The other common place is Account Payable departments. Here is a not-so-uncommon picture of the way a bill was paid at one of our customers before the process was automated:
Even though this customer had implemented an ERP Accounts Payable system, the Accounts Payable processes had not been upgraded. Here's where workflow and imaging enters the picture -- it allows you to tap into the full power of these expensive ERP investments by automating, sometimes redesigning and always streamlining the business processes which touch these powerful ERP systems.
In many cases, you can take dysfunctional business processes which used to take, for example, 10, 15, 20 or even more steps and reduce it to less than 5.
Now, the root cause of these dysfunctional processes is NOT that the ERP system is flawed but that critical pieces of information are often NOT online in a tightly integrated fashion, which causes the communication and collaboration channels to be highly inefficient - here we're talking about the back and forth e-mails, faxes, copies, interoffice mails, Fed Ex's, etc.
These inefficient business processes can be dramatically improved to truly leverage your existing ERP systems if you capture all your information online, tightly integrate it, and then provide a highly intuitive and intelligent way to interact with that online information.
Paying bills should not be like passing laws ... or making sausages.
-Rakesh
Posted by Rakesh Shukla on Fri, Sep 12, 2008 @ 01:37 PM
221 Days, 16 Hours, 23 minutes ... that's how long it has been since the Patriots lost the Super Bowl and I am still crying over that loss. Did they really lose the championship game after going 18-0?
I am still in denial.
Unfortunately, denial is only stage 1 of the "5 Stages of Grief." The "5 Stages of Grief" is process by which people deal with tragedy and grief and was introduced by Elisabeth Kubler-Ross in her 1969 book "On Death and Dying."
The stages are:
- Denial: "It can't be happening."
- Anger: "Why me? It's not fair."
- Bargaining: "Just let me live to see my children graduate."
- Depression: "I'm so sad, why bother with anything?"
- Acceptance: "It's going to be OK."
These stages can be applied to any form of catastrophic personal loss ... a loved one, job, freedom, a Super Bowl loss ... Tom Brady getting injured for the season ... and even Accounts Payable!
With some help by some great illustrations by Steve Greenberg (http://www.greenberg-art.com/), here is a tongue-in-cheek look at "The 5 Stages of AP Grief":
The 5 Stages of AP Grief
Stage 1: Denial
"There is just no way that there could be anything wrong with the way we process invoices around here. Whatever frustrations business managers, suppliers, auditors and my AP staff say they are experiencing must be bizarre delusions caused by impaired reasoning."
Stage 2: Anger
"I am SOOOO furious! WHO'S TO BLAME? I'm not gonna stand for this!
Why can't those lazy business managers send their invoice approvals in on time!
Why can't those incompetent suppliers send invoices that actually match the POs we send them!
Those @#%*! auditors found another control deficiency! Those pointy-headed, bean-counting suits are just too picky!
Those procurement boneheads are no help in resolving holds"
Why can't my AP work more efficiently with less errors?!"
Stage 3: Bargaining
"If we can just survive this quarterly close, I promise to do away with the manual, paper-intensive processes that are causing such long work hours. If this all goes away, I will simplify and automate our processes ... I PROMISE."
Stage 4: Depression
"This job is so hard and nobody appreciates all the hoops we have to jump through to get a stinkin' bill paid."
Stage 5: Acceptance
"It wasn't supposed to be this way... but I guess this is life. It is what it is. And, hey, if paying a bill was as easy as it sounds, I wouldn't have a job."
Again, thanks to Steve Greenberg for the great illustrations!
Illustrations by Steve Greenberg, Ventura County Star, Calif.
Posted here with artist's permission.
http://www.greenberg-art.com/
-Rakesh Shukla
Posted by Steve Wilcox on Mon, Aug 18, 2008 @ 03:02 PM
"There are three kinds of lies: lies, damn lies, and government statistics."
Variously attributed to Mark Twain,
Benjamin Disraeli,
Alfred Marshall
and several other dead people.
Anyone who has worked with numbers knows the end results can be manipulated if one tortures the numbers long enough. Washington's smoke-and-mirrors number crunchers are infamous for this type of hocus pocus. As the cost of everyday items like gas, food, medical expenses, education, etc continues to rise rapidly, do the Government's sanitized statistics for CPI, GDP and unemployment really make sense? Of course not!!! Very few people understand that the government formulas used to calculate economic statistics are constantly changing! Yup, every year the government changes the formulas ... usually in a way to make themselves look good. I won't get into the details of hedonics and other statistical trickery but if you were to use the government formulas from 20 or 30 years ago to calculate CPI, GDP and unemployment, you would get very different and very disturbing numbers. John Williams (http://www.shadowstats.com/) contends there is rampant data distortion - the real unemployment rate is 4-7% higher than what Washington claims, inflation is 5-9% higher and the GDP is actually 5-6% lower (which would put us in a recession).
But it is not just the public sector which distorts the numbers; it is also quite common in the private sector -- specifically, corporate finance. The pressure to make the numbers and threats from bosses can result in exotic number massaging and some very creative accounting. Even with SOX, this nonsense continues. CFO.com recently published an article titled An Anatomy of a CFO's Agony which is a case study of one CFO's relentless, exhausting pressure to hit the numbers and the accounting cartwheels required to make ends meet.
Within Finance, potential skullduggery does not stop with accounting but also includes metrics -- the act of collecting data about systems and processes - and then reporting them in dashboards. Metrics allow you to track progress toward top goals, alleviate key pressures, and solve key challenges ... BUT figuring out which metrics to gather and how to gather them accurately is crucial despite Dogbert's consulting advice:
DILBERT: © Scott Adams/Dist. by United Feature Syndicate, Inc
Even worse than pointy-headed bean counters gathering metrics just for the sake of gathering metrics is gathering stupid metrics that can drive unintended behavior. Let me give you a great example in Accounts Payable - a true story of a really dumb AP productivity metric that led to unintended consequences.
I was at a company a few years ago where they actually measured productivity using a ruler. The dreaded ruler was used to measure the size of paper stacks on employees' desktops. The thinking was that if the stack was small, the employee was being very efficient. What was the unintended consequence of this metric? AP Clerks learned that if you store invoices in your desk drawer ... you become a lot more efficient. The "ruler" productivity metric was just a stupid lie and led to all sorts of visibility issues where invoices kept getting "lost" in desks, payments were late, discounts were lost, procurement and suppliers were unhappy, etc.
So what are the AP metrics that should be measured to promote the right behavior? And how and when should these metrics be gathered?
-Rakesh Shukla
@rakesh170
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