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Cash Management as a Competitive Advantage

12.03.2018

One of the first lessons learned by business students is that cash is king. This is explicitly taught in classrooms and plays out when firms cease operations because they are unable to pay their bills or creditors. From startups to mature business, cash flow is critical to success. That is why businesses that optimize their cash cycle enable better business performance and gain a competitive advantage. Firms that do this well consider cash management one of their core competencies.

Cash flow management is not easy. Do you know the total value of your accounts payable due in the next 30 days? What about credit and past due collections from your customers? Businesses can go bankrupt even with strong revenue if the payment is never collected, so following up and creating data visibility is critical to long term success. Cash management is often hampered by inefficient or overly complex processes. For example, it’s not possible to forecast payables if the invoice isn’t entered into your ERP system on time.

With strong reporting systems, short term cash management can be put into place. If you have a high degree of confidence in payables due in the next 30 days, you can make decisions on how to fund it and meet obligations to your third-party partners. However, this is still dependent on strong governance and routine for processing invoices and sales.

Building on that routine, you can partner with the business units to develop a cash forecast model that ties to your budgeting process. As the forecasting horizon expands, the confidence in your process and data will enable business decisions of whether to use cash to repay debt, optimize tax planning, improve critical metrics, and increase key reporting period confidence.  All these benefits can used by investors to value your business.

It may seem easy to begin tracking and monitoring your cash flow, but there are several challenges a business faces when implementing this change. First, access to data may be difficult. Pulling the right information consistently from systems of records can be challenging, especially for firms that operate multiple business units across more than one location or with multiple operating systems. Second the internal business processes must be set up to enable data integrity and timeliness. Heavy reliance on manual processing leaves room for errors and delays, which in turn reduces the ability to develop KPI’s and meaningful forecasts.  

For longer term forecasts, integration with business unit forecast is critical for success. Fluctuations in sales forecast may greatly swing credit and cash inflow assumptions. On the buy side, newly negotiated contracts or un-documented contract pass-throughs can challenge the AP visibility.

This all sounds logical and beneficial, so what steps can be taken to optimize your cash flow? First, clearly identify your goals and communicate them to your business: are you focusing on paying down debt or saving cash for the next investment? Do your employees know whether you’re in a growth phase where investment is higher than revenue?

Next, you need to understand which levers will create the biggest impact. A process map of the current source to pay flow will identify what key performance indicators (KPIs) you can track, where manual processes are slowing information down, and where there is opportunity to improve.

Process mapping can add value in other ways. It will identify other areas that can be automated, decreasing the need to grow headcount and increasing process control and compliance. Data and KPI review may uncover opportunities to negotiate terms with suppliers, use a credit card for some types of expenditures and help benchmark prices and terms.

Finally, for cash optimization to become a core competency, change management is necessary to help institutionalize the new ways of working. Using the right channel to clearly communicate your “why” can alleviate confusion as new processes and policies are introduced. Transparency with your customers and suppliers is also key. Any policy or process changes should be communicated in a professional manner. Reinforcing the change through shared targets or metrics will also bring business users and your accounts payable and accounts receivable teams closer together.

Formalizing your approach to cash flow will unlock liquidity trapped on your balance sheet and enable growth. Contact us today to learn more about best practices so you can be ready when the next investment opportunity arises.

This article is the first in a series that will address best practices for cash flow optimization. Stay tuned for the next article in this series that will cover how to optimize accounts receivables.

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