Finance

Six ways to talk cash

There’s always a good reason to tighten up capital. When you’re growing, it creates investment overhead. In tough times, cash is a buffer. But it’s all too easy to let things slip. (PwC’s working capital survey reckons we have – to the tune of €1.1trillion globally.) And the best way to tighten up is to get the message out to people outside finance.


1. Keep it simple

Finance knows the mantra: “Sales are vanity, profit is sanity, but cash is king.” Cash is what pays the wages every month, after all. But some sales or procurement people might see things differently. Sales to clients on generous terms? Supplier volume discounts? They make the accounts look good, but it’s all working capital being eaten up.

So keep the messages straightforward. The ‘change in debtors’ in a funds flow statement doesn’t mean anything to most people. It’s the effect of two forces – revenues and cash collected. So pull them apart in a way that people in the business will get.

2. Be positive

If you don’t get the message right you’re going to give finance a bad reputation. Incentivise good working capital behaviours – like bonuses related to cash in – and try to show how not taking that volume discount from a supplier is a great piece of business. Lots of companies used bonuses to manage working capital in the recession – but there’s no reason to take the foot on the brake, especially during a period of uncertainty.

3. No let-up in the language

Always ask, what’s the effect on cash? Even at board level, don’t talk about ‘stock’, refer to it as the ‘cash tied up in stock’ or ‘cash tied up in debtors’. Also: be specific. The more you can use amounts, the better – it makes the cash situation seem more real: ‘we need £9m of cash each month just to break even’.

Precision is important. This is McKinsey on the issue: “many inventory managers, for instance, create target levels based on gut feel rather than calculating stocks based on observed variability.”

4. Automate cash-sensitive processes

Your salespeople probably hate chasing signed contracts, holding customers to terms and picking up the phone to credit control. Why? Because it can put deals in jeopardy. So make it easier for them to do the administration around deals, and make it harder to avoid it.

Technology makes the information about cash more readily available. Real-time data means quick answers to the sales team (and even allows for more agile promotions to generate cash quickly if need be). It also means you can forecast cash more accurately.

Better yet, automate the processes (JP Morgan published a whole paper on the benefits) around both accounts payable and receivable. If your back-end accounting system can pre-populate forms and allow sales teams to focus on the sale, not the paperwork, while giving clear answers on routine metrics – so much the better.

5. Find cash and working capital allies

If some people are still eating up working capital – in stock, say, or debtor days – they need to be dealt with. Warning: pick your battles. If you lose, it sets a dangerous precedent. For example with salespeople, ensure agreement to payment terms is as important as price when they’re negotiating. And offering 90-day terms as a sweetener? That’s a decision only an FD should be taking.

So get the backing of the CEO and board colleagues. Then involve people in the decision-making around working capital to turn them into cash advocates. How about a workshop? McKinsey again: “The finance function should not set these targets on its own. Rather, it should involve operations managers, who can also take the lead on improvement initiatives.”

And advertise success. Cash in from a particular salesperson’s client base, for example, could be celebrated as much as sales themselves are. And your company dashboard should include changes to working capital or cash metrics. That applies as much to procurement as sales.

6. Make it personal

Use peer pressure to motivate better behaviour. Cash means bills and salaries get paid. Rash spending or inefficient working capital practices might hit both. One old FDs’ trick is to get people thinking how they’d feel if it was their money. Find ways to make people angry about that 90-day money – and make them feel great if they’re negotiating a smarter deal on the supply side.

Sometimes getting a cash-sensitive culture inside your business isn’t enough. What do you do when times are tight? Here’s a refresher on steps to take:

Can you negotiate with suppliers? Will they accept cash up front for new orders and a gradual, predictable pay-down of accumulated debt?

Can you borrow to boost cash? Low-interest rates mean if you’re lowly geared, you might be able to borrow and secure early payment discounts from suppliers to reduce working cap.

Are you sure about invoice discounting? It’s not cheap, and you can run into problems if sales dip. Physical assets are better collateral.

Can you consolidate debt? With rates so low for this long, if you haven’t done this yet, why not?

Can you disaggregate? If the business owns assets, you always have cash options. It might just be a matter of structuring. For example, sell firm property to a company commonly owned by the shareholders, then lease it back to capture value and free up cash.

Can you sweat your assets? A manufacturing facility on eight shifts a week is cash flow going unexploited. Could you find external customers for the other shifts?