8 ways to... Improve cash management across your business

Having a cash culture in the finance function is useless unless front-line staff understand its importance – and how they affect it. Here are eight ways to get the message across.

 Keep it simple

At its most basic, the message needs to be: “Cash, not sales or supplier discounts, is what pays your wages every month.” Then you’ll need similarly straightforward sound-bites to drive the right behaviour in each team (see point seven).
 
“Don’t use a funds flow format, for example,” says Paul Hinder, former financial controller at Cable & Wireless and now a plural non-executive and portfolio CFO. “What does the ‘change in debtors’ in a funds flow mean to most people? Probably nothing. It’s the effect of two forces – revenues and cash collected. So why not measure them separately in a way that means more to people within the business?”
 

 Set the right balance

Accountants need to think in terms of sales and profits as much as working capital. “Cash is the toughest covenant our bank uses – every month, we have to be cashflow-positive on a rolling 12-month basis,” says Frank Eliel, FD of Signs Express and part of the MBO team at the company.
 
“That means we need a substantial profit on any new capex within a year. And it’s a reminder that cash all starts with the top line. If that’s not working, no amount of debtor or stock management will help.”
 
If you get the balance wrong and focus too hard on cash with sales and operational managers who probably think they’re doing a great job, be prepared to rename yourself ‘sales prevention officer’ or ‘scrooge’. Positive incentives – like bonuses related to cashflow – might work better.
 

Be repetitive

“I always ask people, in any situation: ‘…and what’s the effect on cash?’,” says Hinder. “The way you refer to it can help. Every time you’re having a conversation, from the board to the shop floor, don’t just refer to ‘stock’; talk about the ‘cash tied up in stock’ or ‘cash tied up in debtors’. And state what amount it is. Refer to break-even in terms of cash: ‘we need £9m of cash each month just to break even’. It works.”
 

Process is crucial...

Every business has terms and conditions and most have a credit management process in place. But how many times are they overlooked in pursuit of a sale or because there’s not enough time for the admin?
“New technology enables finance to get at the information about cash much more quickly,” says CIMA’s financial reporting specialist, Nick Topazio.
 
“Real-time data on cash allows them to communicate with the sales team, for example, on exactly how they’re performing day to day.” It also means you can forecast more accurately and issue remedial messages promptly.
 
That said, credit control and order processing should never be the sales team’s responsibility, say our experts. It should sit with finance or customer services – teams that have an interest in the proper application of process.
 
And visibility isn’t the end-game for a cash culture. “It’s laughable to think you could work your way out of a working capital situation by investing in ERP,” says Malcolm McKenzie at consultancy Alvarez & Marsal. “You want simple systems that deliver basic messages everyone can understand.”
 

...but so is influence

“Make sure these processes are enforced – and then go into battle with the perpetrators where they are not,” says Hinder. “Make an example of them. But pick your battles – you can’t afford to lose.”
 
Always get the top people on side, he adds. They’re a vital ally if you’re taking on people who are blasé about cash. “Without the CEO, you are doomed to failure. If they need it – and some definitely do – put the effort into educating them about the drivers of cash first, then work down and across the organisation with the messages that hit home.”
 
A good way to influence people is to involve them in the decision-making around cash. “Determine which functions or stakeholders have most impact on the elements that affect cash, bring them together in a workshop and ask them how they can improve them – let them set up their own action plan,” says Marcel Willems, a former divisional CFO at Sara Lee.
 

Create cash heroes

In too many businesses, the credit control team is invisible – or simply has a reputation for saying “no” to new customers. “So make it a sales responsibility to ensure customers pay, one way or another,” suggests Hinder. “Salespeople like to be heroes. Make them real heroes by advertising the fact they’ve got cash in.”
 
Once you’ve found the metrics people can relate to, make them widely available. Use company whiteboards or the intranet to show how the cash position is changing. This will also accentuate great cash victories – like clearing a stock log-jam or settling disputed invoices – that are treated as menial jobs, but can deliver vital boosts to cash.
 

Use obvious metrics

“Our analysis says we collect 30 per cent of cash within 30 days, but by 45 days it’s up to 70 per cent,” says Paul Marsland, FD at Lane Clark & Peacock. “We explained to partners that if they bill by the middle of the month, we’re likely to get a majority of the cash in by the end of the following month, in time to manage cash outflows such as salaries, taxes and partner drawings. It’s a measure everyone can understand.”
 

Make it personal

Marsland is now introducing a public “traffic-light” system to show which fee-earners are billing promptly. “It’s pure peer pressure,” he says. “If your pay packet is influenced by your contribution to cashflow, it’s going to affect your behaviour,” says Topazio.
 
Huw O’Connor, former FD then MD at City Inn, has a simple approach to get the message home. “Get people thinking how they’d feel if it was their money,” he says. “When reviewing debtors’ ledgers with my general managers, I used to ask them how they would feel if someone came into their hotel bar, drank a bottle of champagne and walked out without paying. They’d be chasing him down the street – so let’s apply the same passion to the ledger.”
 
Richard Young is a freelance writer and editor, and co-author of the CIMA guide to improving cashflow, out in April 2011.
 

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