Finance & Administration

Cash management

In spite of notoriously low levels of net cash flow, the industry has not yet widely adopted professional cash management practices. Cash management strives to achieve the optimum cash level to manage daily cash requirements and avoid the opportunity costs from lost interest rates or additional interest paid for short-term financing.

Many medium-sized and larger companies are too conservative in their approach for managing cash, others use too much short-term financing rather than a partial shift into medium-term rates. The main reason is a lack of integration of the cash management function into the finance processes that drive the cash levels. Just like product inventory is driven by sales and production, the cash level is determined by receivables, payables and loans. The cash manager often finds himself in the spotlight without transparency of information or authority to drive value. This results in very conservative cash levels to avoid personal blame.

Value opportunity exists in having the required daily data, analyzing trends of cash levels over longer periods of time and determining the optimum cash levels. This is achieved by value-driven process redesign to allow for true visibility and transparency of cash levels across the corporation. Once this has been achieved, standard tools can be applied to determine the optimal cash level. A forecasting process alongside a running trend analysis needs to be established to allow for up- to-the-minute optimized cash management. Responsibilities have to be defined properly and the performance management system adapted to generate value.

From our point of view, cash levels can often be reduced by 2% of yearly turnover to achieve interest savings of 1-3% on the amount in question. Valued at weighted average capital costs, the savings are even greater.

Working Capital Reduction

Reducing working capital by managing the payables and receivables processes almost seems too obvious to talk about. In today's tough competitive landscape, every company claims to have a strong focus on this subject.

Upon closer inspection, it is our opinion that additional value can be captured by managing the details. Typical industry quotes include, "I have negotiated tough payment terms and we cannot press our customers / suppliers further or this will show in the price," or "If we pressure our customers to pay earlier we will lose them." There is certainly truth in these statements. However, managing working capital properly requires a breakdown of the processes that drive working capital levels. Too often the management of the process is left trying to manage payment terms up or down, or going after overdue customers late in the process.

Potentials can also be found in the internal process set up, quality and consistency of data and in the responsibilities in the process chain. A company's ERP system is often programmed based on the best knowledge of the programmer without a clear business rule or value-driven process design up front. Potentials can be found in the frequency and intervals of the dunning runs and in the definition of the date stamp for the calculation of overdues. From a process responsibility side, too much is left to the sales force to settle in the favor of the customer.

Often it is easier to use the good guy / bad guy approach and leave as much of the standardized processes to the back sales office or finance functions. In this manner, adherence to agreed upon terms & conditions is managed separately from the sales negation process. This results in the sales person conceding fewer compromises on overdues. Additionally, the incentive systems need to be checked against the working capital targets. In many situations the sales force or procurement functions have a very strong influence on the working capital levels, but personal incentives are not aligned and sometimes achieve the opposite (e.g. volume-based sales incentives vs. tough payment conditions).

At StepChange Consulting we have the experience to increase your cash flow significantly, driving value from the operational side of working capital management.