Reviving your cashflow by adopting best practice principles in your business

We have given extensive coverage to the external macroeconomic factors that will drive global economies over the next year. Barring a significant shock or a Black Swan event, expectations are that 2024 will be another challenging year for many global economies and Africa in particular.

Cash flow is the lifeblood of a business. It is also a primary indicator of whether your business is heading for distress. As Board members, you cannot discharge the obligation to review solvency and liquidity without a comprehensive understanding of the cash cycle and the cash flow forecast.

In this respect, both Finance Executives and Board members need to be up to date with international cash management best practice principles.

Leverage technology to shorten the cash conversion cycle

The client journey, from quoting to the conversion of sales to debtors and debtors to cash, needs to be reviewed in every business.

When you measure the duration of the sales to cash event, you need to track each element of the process. Have you developed key performance indicators (KPIs) that help measure and improve performance for every event? The quoting process draws in resources and needs to be managed carefully. Further, each opportunity assessed within the sales cycle needs attention. This also forms the foundation of sales forecasting and cash flows.

In your resource planning (including logistics and manufacturing) do you track your back orders and cycle times? What is driving the bottlenecks in the logistics and manufacturing cycles? Of course, the accuracy of sales forecasts and stocking levels severally impact your inventory and work in progress levels. Often, they need their own interventions. The recent SAP issues at Spar and other major retailers speak volumes to this issue.

The creation of vendor portals and other tools allow for the prompt delivery of invoices and real time cash collection before resources are committed to fulfilling the order. These portals can handle credit limits and dispute resolution and vastly improve customer service interactions without the client getting frustrated due to queuing challenges in voice call centres.

These solutions also tend to provide organisations with timely and robust reporting that can help you take proactive steps to resolve delinquent accounts or take advantage of supplier discounts.

Optimise your functions

 It is important for companies to optimise business functions that monitor the sales cycle. This includes procurement functions to focus on discounts, lead times and prompt delivery practices for manufacturers and retailers.

The procurement optimisation function using electronic trading and payment platforms can really improve you cash flows. Only paying for what you need when you need it reduces inventory and lead times on delivery to customers.

There are also best practices that companies can adopt from an inventory perspective. For instance, it makes sense to periodically analyse accounts and stock-keeping unit (SKU) profitability to identify slow-moving, obsolete and non-profitable inventory so you can reduce inventory levels. Discounting and selling these as redundant goods or services improves storage space management and record accuracy as all hidden efficiency gains that improve staff productivity are optimised.

It’s also important to consider the cash flow implications of changing your supply chain strategy. Companies that source products from low-cost countries, for example, might enjoy lower per-unit costs but might need to make earlier cash outlays or place bigger orders. On the flip side, companies may pay more per unit to purchase locally but avoid an upfront cash outlay. There is no one-size-fits-all approach. The key is to understand the implications of different strategies so you can make an informed decision.

Making it visible – cash flow reporting

The Deloitte insights point out that, to truly foster a cash management culture, you need to actively track your cash flows.

Forecasting is a critical step in cash management and ultimately improving profitability. This involves looking at both income and cash flow statements and linking your cash flow forecasts to key working capital metrics from the balance sheet, such as days inventory on hand (DIO), days sales outstanding (DSO) and days payables outstanding (DPO). This practice is even more critical in-service industries and helps fund payroll costs.

Measures around services and efficiency need to be developed to support your business. These are inherently more complex to develop and track but in service industries with no trade creditor to finance wages that are even more critical to a healthy cash flow.

Also, be sure to include capital expenditures, debt repayments and other operating cash flows so that management is aware of the full spectrum of cash requirements.

To enhance the accuracy of these forecasts, consider automating this process rather than relying on error-prone and labour-intensive spreadsheets.

It is helpful to actively review variances in actual results as compared to forecast and use this process to refine and improve the accuracy of your forecast assumptions. Also, be sure to integrate cash flow forecasting with your P&L statement and balance sheet so you can track performance against a range of indicators.

Move to weekly cash flow forecasting and reporting to improve the visibility and reliability of information and consider establishing a cash committee to oversee this process and drive change through the organisation. This is common practice in cash constrained businesses but can really improve your cash flows and business understanding of business unit managers.

Matching funding to your cash flow obligations

The Deloitte insights point out that every business has both short- and long-term cash flow obligations. Short-term requirements encompass day-to-day operational expenses. Longer-term obligations typically refer to capital project investments and term debt maturities.

To become proficient at cash flow management, companies must match their various sources of funding to their capital flows. This can ensure that an otherwise profitable business has access to the cash it needs to meet its ongoing obligations.

Take an enterprise-wide approach to cash management

You can’t manage cash in a vacuum, particularly if you have various locations, branches or retail outlets. That’s because you need the ability to resolve cash flow crunches no matter where they show up across the extended enterprise.

To gain an enterprise-wide view of cash management, it’s important to track your sources and uses of cash by both type and location. It can also mean engaging functions such as sales, procurement and operations more meaningfully in the cash management process.

By gaining a holistic view of your cash flows, you should be able to answer the following questions:

• How does cash flow around the enterprise, and what responsibilities/accountabilities do finance and other functions have in relation to cash management?
• How do you compare to internal and external benchmarks? Are you meeting the norms for working capital turnover in areas such as DSO, DPO and DIO?
• Do you have capital spending plans in place, and have these been matched with corresponding sources of the required cash?
• How much cash and inventory do you need to hold in each location? What is your process for funding different business locations that may be experiencing short-term cash flow shortages? This can be a major challenge in the event of a foreign branch when local payments are made in foreign currencies.
• How are cash generation and preservation actions encouraged and incentivised across the enterprise?
• If you consolidate your various bank accounts and/or streamline the way each location collects receivables, can you reduce the amount of cash trapped in transit?
• Do you optimise the matching of cash and capital flows in both the short and long term through the alignment of debtor and creditor terms with one another and through the proper matching of capital spends with capital sources?
• Is working capital performance a component of staff and executive compensation?
• If you were able to free up cash from working capital, what would be the most beneficial use for it?
• How would a significant change in interest rates or sales volumes affect cash flow?
• Do you have a plan in place in the event you need to change your dividend policy (i.e. to go from a cash-only dividend to combined cash and stock or stock only)?

For those companies of a significant size estimation of the cash flows in advance often resort to revolver facilities which are generally the most expensive from an interest rate point of view.

What do we need to address?

Aligning yourself with the above principles is an excellent place to start when it comes to establishing a cash management system that will benefit your company. These questions should be answered by the financial and operational executives of well-managed companies. Every entrepreneur does it intuitively because they are capital-constrained and understand cash is the very lifeblood of the enterprise.

Reviving your cash flow should be a strong focus within your company.  This is one of the best ways to avoid financial distress.