Managing Accounts Payable: A CFO's Guide to Navigating Financial Strain

As a CFO, one of the most stressful situations you can face is managing creditors when your company is struggling financially. A growing accounts payable balance can be a significant distraction and source of stress, especially if the company falls behind on payroll remittances, corporate income taxes, and GST/VAT repayments.

Taking phone calls or responding to threatening from disgruntled suppliers, staff or lenders is hardly anyone’s idea of a relaxing day at the office. Especially, when you have more critical tasks such as strategy, management, reporting and raising capital.

In this article, we will explore practical strategies for managing creditors effectively, including communication, negotiation, and legal considerations.

1.Communication and Openness

When dealing with outstanding creditors, communication is key. While it can be tempting to avoid those impatient calls and emails, especially when you are time-constrained and busy; maintaining an open dialogue with creditors is crucial.

Why Communication Matters

Ignoring creditors can escalate the situation and damage your company's reputation. It can render certain business and relationships with stakeholders, especially critical partners, largely untenable without an attempt to remedy or mend the situation. The situation is usually a failure or inability to pay most or any of the outstanding balance on time.

Creditors may feel ghosted or dismissed, leading them to take more drastic measures, such as:

Escalation to Debt Collection Agencies: Debt collectors are usually less patient and more aggressive in their pursuit of payment. Unlike a supplier, who may still want to sell to your company; debt collectors are merely results or deliverables focused on behalf of the creditor (their client).

Legal Action: Failure to negotiate with or comply with debt collectors can result in legal action, including small claims court or other court proceedings. Litigation is one of the worst activities a company or individual can get involved in. Hence, the importance to avoid this at all costs, and devoting time and money to pay down the outstanding balance.

Effective Communication Strategies

Respond Promptly: It is critical dedicate sufficient time daily to respond and placate creditor inquiries, even if your company doesn’t have a concrete or complete solution to pay down its accounts payable. Don’t underestimate the amount of time you will consume out of your busy workday as a CFO hearing out aggrieved suppliers to debt collectors. Be careful with how you respond to creditors insisting on concrete timeframes to pay. Remember not to overpromise anyone, as this will only make them more aggravated and less trusting of you going forward.

Negotiate Payment Plans: Work with creditors to cultivate a mutually agreeable payment plan. This demonstrates your commitment to resolving the outstanding balance. It is crucial to spend time thinking through a realistic and achievable payment plan, as your company will be held to it by the creditor i.e. government entity such as the inland revenue or tax authority.

It is possible, the company might need to raise additional capital, or seek a short-term loan from its investors, management or board to have sufficient funds to cover the payment plan.

Be Transparent: As the CFO you must be prepared to explain your company's financial situation honestly and clearly. Creditors are more likely to be amenable if they know you're actively working to address the issue – in other words you are paying down their balance. If it is applicable and possible, endeavour to voluntarily reach out to creditors and update them on the company’s sales growth or capital raising pursuits.

Maintain Professionalism: It is necessary to remain calm, courteous and respectful, even in the face of stress, frustration or anger. Attempt to building trust and rapport with creditors, because it can lead to more favorable outcomes and moral support from these creditors.

2.Prioritizing Government Balances

Outstanding balances owed to government entities, such as tax authorities, should be treated with the utmost priority and seriousness. These liabilities can have severe consequences if left unaddressed. If your company owes money to both government and non-government entities, then don’t be afraid to communicate to these non-government creditors. As much as they won’t like to hear it, they will be forced to accept the fact government debt generally rank ahead of them.

Consequences of Non-Payment

You as the CFO must make it aware to all company stakeholders how tax authorities have the power to, in the event of non-payment by a company:

Seize or Garnish Bank Accounts. They can freeze, garnish or seize company funds to recover outstanding taxes.

Garnish Wages. They can deduct money directly from employee wages to meet company tax debts.

Place the Company into Administration. In some instances, tax authorities can seize control of the company to recover their debts. This can render the company unable or challenged in making payroll or critical suppliers to deliver finished products or services.

Personal Liability. In some jurisdictions, tax authorities could hold company officers or directors personally liable for unpaid taxes.

Strategies for Managing Government Balances

Managing relationships with government creditors presents unique challenges for CFOs and executives, creating exceptional pressure. A comprehensive strategy is essential to effectively address these challenges:

Proactive Communication: Contact the relevant tax authorities as soon as possible to discuss payment options. Calling them is best, as it will allow you to start building rapport and goodwill, as opposed to hiding behind mail, faxes or emails.

It can be confronting, but it is the best way to bring things to ahead and even alleviate some of the stress felt from the situation. Kicking the problem down the road will not only aggravate the tax authorities but can worsen the consequences of meeting your company’s tax obligations.

Negotiate Payment Plans: It is vital to work with the authorities to establish a payment plan, which aligns with your company's financial capabilities whilst still allowing your business to continue as a going concern.

In some instances, the company might need to reach out to key shareholders, executives and board members to source a short-term loan, in order to honor the company’s payment plan.

Prioritize Tax Liabilities: Remember to allocate available funds to pay off tax debts first, as they usually have the most severe consequences on your company. Avoid non-value adding or indulgent capital or operating cash outflows, whilst you focus on paying off the outstanding government tax debt.

Be clear, be confident and don’t overthink it. The beauty of your story is that it’s going to continue to evolve and your site can evolve with it. Your goal should be to make it feel right for right now. Later will take care of itself. It always does.

3.Navigating Litigation

Litigation can be a significant financial and opportunity cost burden for any company. It can be a substantial mental, emotional and time drain on executive management too. Lawsuits can arise from various sources, including aggrieved employees, customers, suppliers, or competitors.

Minimizing the Impact of Litigation

Here are some pointers to consider helping avert costly legal bills for your company:

Explore Alternative Dispute Resolution. Try to entertain mediation or arbitration as alternatives to traditional court proceedings. These methods can be faster, less expensive, and less adversarial. They are way less time consuming and emotionally draining to you, as the CFO and the executive team, given you have a business to run on a daily basis.

It is vital to adopt an open mind with mediation or arbitration. Both parties must be prepared to negotiate and arrive at a middle ground on the issue at hand. An adversarial approach will only increase the probability of failure and money spent on legal representation..

Seek Early Settlement. If possible, try to reach an out-of-court settlement with the aggrieved party. This can save your company time, money, and reputational damage.

Engage Experienced Legal Counsel. If litigation is unavoidable, hire experienced legal counsel to represent your company's interests. This will inevitably be an expensive undertaking, however at this stage, you will probably want to hire premium and suitable counsel to win the lawsuit – or at the very least, mitigate the financial settlement.

Plan for Potential Payouts. If a settlement or court judgment requires a financial payout, properly provision for this into your company's financial planning – investors and stakeholders don’t like surprises.

4. Proactive Financial Management

As the CFO, it is important to know how preventing creditor issues requires proactive financial management. Here are some key strategies to consider if you are dealing with material accounts payable balances:

Cash Flow Forecasting: Accurately forecast cash inflows and outflows to anticipate potential shortfalls.

Working Capital Management: Optimize inventory levels, accounts receivable, and accounts payable to improve cash flow. Unexpected nuggets of cash can be proactively put to paying off bonus amounts to creditors.

Cost Control: Identify and reduce non-value adding or unnecessary expenses to improve profitability and free up cash with your business.

Financial Planning: Establish a comprehensive financial plan that includes strategies for managing debt and liquidity.

Conclusion

Managing creditors effectively is essential for navigating financial challenges, ensuring business continuity and preserving your company continues as a going concern. By prioritizing communication, negotiation, and proactive financial management, CFOs can successfully address creditor issues and minimize their impact on the company's operations.

Remember, seeking professional advice from financial advisors or legal experts can provide valuable guidance and support during these challenging times. Managing creditor relationships can be one of the most demanding challenges in a CFO's career. It's essential to involve other executives in this process. Handling these relationships effectively can require significant time and resources from across the organization to guarantee your company’s future.