Twenty days before quarter end, management at this division of a Fortune 500 company learned that reductions in inventory were not materializing as forecasted...

The resulting increase in capital charges would reduce the rate of return as forecasted by executive management. With twenty days left in the quarter, the primary option for overcoming the inventory shortfall was to look at significant and unexpected increased cash collections. Accordingly, the cash target was increased by 20%.

CashFlow Enhancement Group had already been in place and was on target for exceeding the previously established cash forecast. As a means of generating the additional cash, CashFlow proposed executing a plan to offer customers a one time 2% discount on invoices due after quarter end provided payment was received prior to quarter end.

While sounding simple enough, CashFlow knew this strategy was fraught with complexities. First, this was no small endeavor. Hundreds of customers would have to be contacted within ten days to have any chance for success. The details of the offer needed to be explained precisely, often to a decision maker such as the controller or A/P Manager. Confusion concerning payment terms could easily occur. Extra resources would be needed immediately.

Would customers try and take the discount on an ongoing basis, on past due invoices or take the discount of eligible invoices and simply not pay past due invoices? Also, would customers have time to process the offer in time to meet the quarter end deadline?

Execution of the Strategy

In order to maximize acceptance of this offer, CashFlow Enhancement Group had to respond quickly and execute with precision. Offers needed to be extended prior to customers’ finalizing their last check runs of the quarter. Maximizing effectiveness while eliminating confusion meant that the offer would be made verbally to decision makers with a brief but specific written document sent as support. Also, customers were advised that payment should be sent via 1-2 day courier and that payments arriving after the deadline would not be eligible for the offer.

Every customer with an eligible balance exceeding $10,000 was systematically identified, including a review of the orders scheduled to ship prior to quarter end. CashFlow Enhancement Group also decided to track every offer extended, accepted or declined with the amount for each category available in real time so if / when the cash target was deemed in reach, the extension of offers could be immediately discontinued.

The Strategy Succeeded

Three days prior to quarter end, CashFlow was able to forecast that the cash target would be met, and the client would meet its working capital goals for the quarter. This strategy has since become an immediately executable option for this client as a means of compensating for shortfalls in other areas of working capital improvement.