“Cash is King” and in no situation is this more prevalent than in a turnaround where often having enough cash flow will determine whether the business lives or dies! Good cash management gives the company the “breathing room” during a turnaround to for instance fund any trading losses and restructuring costs while keeping creditors controlled.
Additionally, a well managed cash flow gives directors the visibility and control to confidently manage a turnaround process on the path back to profitability.
Here are a 5 tips to help directors, CFO’s and finance staff better manage cash flow:
1. Focus on the key levers of working capital, being extending trade creditor terms and reducing debtors and stock holding. Typically, these present the best opportunities to quickly improve your cash position.
All three of these levers can be utilised in a coordinated way to improve net working capital and one single area should not be exclusively focussed upon as “dollar for dollar” they all have the same impact.
For each of these elements of working capital the reported balances must be properly measured/recorded with amounts written off and adjusted when incorrect. For instance there is limited cash benefit in trying to:
Reduce the stock holding if the “excess” recorded stock is in reality older stock which is worthless.
Collect older un-invoiced WIP which a client has disputed and the business is unwilling to pursue.
2. Maintain a 13 week rolling short term cash flow forecast.
Importantly a business must maintain the discipline of (say) every fortnight:
Updating the forecast.
Comparing actuals to the prior forecast and adjusting forecast assumptions accordingly.
The forecast being reviewed/considered by senior management such as a CEO or board and including people who were not involved in its preparation ie outside scrutiny and accountability is important.
If a business has not historically (and regularly) produced cash flow forecasts then the first and the second and the third forecast will be inaccurate but each time by a little bit less.
3. Include cash flow improvement measures in the performance management of staff.
Good cash management can’t only be important to the CFO and finance staff.
Relevant staff from each stage of the supply chain through to sales need to understand the potential cash impact of their decisions. For instance product procurement staff should be considering supplier’s credit terms in negotiating agreements.
Therefore, including cash management related objectives in the KPIs of relevant employees is an excellent way of ensuring staff are motivated to improve cash flow.
4. Doing deals can be a good way to get cash collected.
For older, disputed or difficult debtors, and at the expense of margin, it can be worthwhile offering a discount on the condition of immediate payment.
Similarly, if there is slow moving stock, it may be better to sell it through a clearance outlet or auctioneer than hang on to the goods.
5. Develop a cash culture within your business.
Good cash management is not achieved overnight despite the best intentions of directors and management.
It is developed over time such that it becomes part of the DNA of the organisation.
To achieve good cash management, directors and management need to:
“Indoctrinate” staff about its importance.
Lead by example.
Be consistent in their approach to cash flow over an extended period.
If you would like a no obligation, confidential discussion about turnaround management and executive solutions, please contact me at svertullo@integralfinancial.net.au