Bringing Cash to the Centre
Emerging Best Practices
The initial response of many business leaders to COVID19 was to ensure survival. Most succeeded and, in the process, reinvented their business to suit the ‘new order’. Some reduced the range of activities or down-sized in anticipation of better days. Others preserved cash by reducing external spending, cutting dividends, closing temporarily and limiting capital expenditure.
Governments softened the blow by postponing collection of their fees or making cash available through stimulus programs.
The good news is that many businesses started embracing BEST PRACTICES in cash management and this will serve them well in years to come. Let’s look at some examples.
A Cash Culture (from the top down)
Leaders are more focused on cash than earnings. Some have taken practical steps to evidence this such as cutting their salaries, changing job descriptions, reducing reliance on contractors, and so on. They have also consistently communicated the importance of capital efficiency metrics (for example, the cash conversion cycle) rather than focus on profit and loss.
Example: A provider of marketing services departed from traditional practices and only entered contracts where at least 50% of fees were paid upfront. They got more serious about collections and required the sales team to chase accounts receivable, which had previously been the responsibility of finance.
Put Cash on the Agenda
Cash has often been thought of as a consequence of other business decisions, rather than an agenda item itself. But it should be discussed in all forums to avoid waste and a preoccupation with profit.
Example: A mid-size construction company set up a ‘cash war room’ to ensure constant discussion on cash management across all of their projects and bids. The CEO chaired these daily 30-minute discussions to increase the gravitas of the proceedings. The result was significant savings and overdue accounts payable reduced by 30% leading to better supplier relationships.
Target Setting
Any initiative takes on a new meaning when there are specific targets. Some metrics which relate directly to cash preservations include:
- return on invested capital (ROIC),
- working capital as a percentage of sales,
- the cash conversion cycle.
Policies are also helpful. For example, you may encourage salespeople to offer discounts or advantageous payment terms in order to increase sales PROVIDED THAT there is guidance on the permissible limits.
Transparency
A readily accessible cash-reporting system means people are not guessing the current status and can celebrate any wins. This also lends legitimacy to any incentive plans.
Example: An events company incentivises the sales team to attract more corporate customers. Noting their customers are slow payers, the company added an incentive designed to speed up collections. The Accounts Receivable numbers are posted on the intranet so the sales team can track progress.
Communication
Not surprisingly, employees and suppliers wonder about the state of the business. Frequent updates on business status (whether good or bad news) will improve the mood in the business and increase retention.
Example: An owner of breakfast restaurant chain started a weekly newsletter for their numerous part-time employees to show them the progress being made in the stabilisation of the business. This has enabled them to retain key employees and attract new employees from competitor businesses.
Many of these changes should not be seen as some kind of emergency measure. It’s simply good business to bring cash to the centre of the business and those that do, are well-positioned to thrive in the coming months / years.
Get in touch with the Alliotts team in Auckland to ensure you have clarity, reports, policies and processes on cash management in your business.