5 Steps to Building a Post-COVID ‘Cash Culture’

In today’s world CFOs are analyzing daily cash inflows and outflows as organizations manage liquidity concerns but in 2020 Finance cannot take responsibility for working capital alone. Creating a cross-functional cash culture expands ownership and accountability for working capital levers and enablers, embedding cash preservation in strategic and tactical decision-making, and activity prioritization.

Organizations are increasingly educating functions in working capital importance, and the impacts which operational decisions can have on liquidity.

In 2020, Finance cannot optimize working capital alone…

Working capital performance and cash flow management can often feel to be quite abstract concepts to individuals not involved directly within Finance and Treasury operations. For many roles and functions the pressures of driving business, maintaining customer service, and ensuring the supply of products and services dictates short-term priorities and decision-making. A significant shift in 2020 is that the short-term cash impacts of operational decisions have become increasingly important to financial health.

Often, functional objectives include revenue, margin, service levels, and cost improvements. These objectives are tangible, performance can be easily measured, and it is relatively straightforward for individuals to identify the actions required which will achieve a target business improvement. The impacts that an individual’s actions, behaviors, or daily decisions have on cash performance and working capital metrics are not always so visible or well understood, nor so easy to quantify.

The time to share control…

In recent years external financing mechanisms, including factoring and supply chain finance programs, have continued to grow in popularity as a means of improving working capital performance and maximizing cashflow. Reasons for this growth include the ready availability of these programs, the ease of adoption, and the relative simplicity compared to organizational upheaval and process redesign. The risk however is that the pursuit of these remedies has continued to keep the focus and ownership of cash within Finance, rather than expanding responsibility and educating business functions on their own role in cash preservation. The question now is, with a potential reduction in external financing availability, and increased factor costs, how else can organizations achieve control of cash and improve liquidity?

 Overcoming the argument of ‘The more inventory we have, the more we can sell’ is key…

In many cases, talk of working capital optimization can be received as going against everything the function is trying to achieve:

• Supply chains are typically measured and incentivized on cost and service rather than cash.
• Increased inventory on-hand ensures availability if the sales come in.
• Large production batches drive unit cost reduction.
• Stock buffers insulate against low forecast accuracy and ‘just in case’ service failures.
• Many procurement teams operate to cost goals, sometimes with the assumption that negotiating terms extensions might eat away at price gains.
• Commercial account familiarity and preference can drive the attitude of ‘this customer always pays eventually’.
• Sales individuals can be conflicted, not wanting to approach customers with demand for on-time payment while striving to achieve revenue and margin goals through sales volume and pricing.

The foundations of building a cash culture

Finance organizations can face a challenge in overcoming these objections if they focus on messaging cash objectives alone. A successful cash culture is based on bringing cash awareness into daily activities and implementing a calculated trade-off mechanism for decision-making which will model the impacts of scenarios on cost, service, margin, and cash.

Key considerations when building a cash culture within an organization include:

1.      Cascade visibility of working capital performance:

Individuals perform best to corporate goals when they can see how their actions help to achieve them. Educating the business on the core working capital metrics and how to interpret them, the drivers of working capital, and the principle enablers drives proper focus. Disseminating a target and quantifying each day of working capital improvement drives activity. Consider a comprehensive working capital training program.

2.      Define the variables and educate on cash vs. cost

Metrics at the right level to drive action are critical but balanced decision-making can only be achieved if the relevant trade-offs are defined and quantified. Cost impacts are usually more tangible, service levels can generally be clearly measured, cash impacts less so. To balance the trade-off, organizations need to not only quantify the cost of cash to the organization, but also to assess the criticality of cash needs to help prioritize decisions. Selecting the right dashboards, and incorporating the best trade-off capture process into a cross-functional review session allows these impacts to be balanced.

3.      Model supplier terms (cash) vs. discounts (cost) dynamically:

Increasingly, Procurement will be tasked with not just driving cost out of the supply chain, but also in leveraging payment terms. Cash vs. cost is a delicate trade-off and requires knowledge of optimal category and region terms, an assessment of the cost benefits of discounting, and a balanced trade-off. The solution may differ by time period which is where organizations may want to explore dynamic discounting. Benchmarking terms and designing a robust term vs. discount process ensures the right decisions are made at the right time.

4.      Balance inventory cost and service against working capital needs

Within supply chain and operations, the trade-off becomes even more complex as cash, cost, and service compete for priority. Defining and maintaining the right inventory levels to provide optimal customer service, while minimizing cost and at the same time preventing excess cash being locked into physical stocks is a delicate balance. Bringing the assessment and appetite for risk into the equation increases the complexity, requiring clearly defined inventory strategies, closely monitored parameters, and defined individuals responsible and accountable for business impacts, including cash, cost, and service. Set targets at the right level, measure impacts, and feed scenarios into a robust IBP process.

5.      Implement end-to-end AR ownership beyond the walls of Finance

As the function which deals directly with cash, accounts receivable is often a more cash aware function. Customer segmentation models, differentiated strategies, proactive issue resolution, and defined workflows are tools which many have leveraged in recent years to improve performance, build cross functional participation, and to mitigate the impact of payment terms extensions. The reality in the post-Covid environment however is that that the most successful organizations will ensure that AR management is not only a Finance responsibility. Implement cross-functional AR ownership, position the AR team as a service provider, and define individual cash targets to drive value, rather than volume, based decision-making.

Building a cash culture helps an organization move away from reporting its cash position, to managing its cash position. Engaging cross-functional stakeholders ensures not only that individuals are looking out for further opportunities, but perhaps more importantly, reduces the risk of individuals and functions making the wrong decisions which could have significant impacts on liquidity.

The unprecedented challenges of 2020 have brought liquidity to the forefront of many CFO agendas. Cost, margin, and service are still important and relevant priorities, but the opportunity in 2020 for organizations to get ahead will be to bring awareness of cash into the balance, and create a real ‘cash culture’ to protect against any further disruptions to come.