Cash is key to the survival and growth of any business. Owners need to manage cash in order to optimize liquidity and improve the “bottom line.”
Basic cash management practices will help to ensure that you and your management team have better visibility of and control over your cash flow which will generate more money and allow you to release cash for your business. Cash released can be used to reduce debt, fund growth and investment or provide a better return to stakeholders.
How many of us can really say that we have embraced and implemented a cash culture within our companies? Good cash management is not about stretching payables and tracking down receivables. It’s really about getting visibility and control of cash and understanding at a very basic level, how it travels through your entire business, where it’s stuck, and why. Ultimately, the objective is to improve the conversion of profits to cash and release the excess cash tied up in the business due to inefficiencies or poor policies and processes.
What’s involved in cash management policies and processes? Nothing more than good housekeeping such as:
• Collect payments and debts on time
• Pay suppliers according to their terms – take advantage of appropriate discounts
• Ensure systems’ data is accurate and relevant
• Understand what your cash balance is every month
• Improve sales forecasting accuracy and demand planning
Keep in mind that just making these process changes doesn’t guarantee sustainable cash improvement. For more long term benefits, a cash-centric culture needs to be embedded to help ensure that cash is linked to business performance management. Cost management is about making lifestyle changes and not simply dieting. It’s not just about cost reduction. It’s very much about employing cost efficiency strategies that allow your employees to take advantage of every opportunity to increase cash flow throughout your business.
Ask yourself and your team if you are taking advantage of all the opportunities on the table. Often companies focus on traditional areas around creditors, inventory and debtors and forget about other large cash flows in the business. Areas such as pension fund strategies, supply chain financing and indirect tax management are overlooked but could potentially release significant cash flow.
Above all else, the most important piece of the equation is the need to focus on sustainability, in order to maintain the benefits achieved. This can be as challenging as improving cash flow and often it presents a higher degree of failure. It is about ensuring that cash becomes a key element in daily processes and procedures. Cash needs to be at the core of your business, aligned with other strategic drivers such as profit, revenue and market share. Often companies struggle due to internal resistance; a strong change agent and clear sponsorship from you and your management are critical for success.
Take the initiative to find ways to embed cost management into employee performance and encourage a cost conscience culture. Consider adopting a cost management lifestyle change within your organization to help you keep costs down by educating and rewarding your people to not only develop systems and processes to monitor your cash spending, but also find ways to reinvest previously wasted cash into new products or new markets to grow your business.
Adopting a cash flow management lifestyle change is not a short fix - it takes time and perseverance. You and your team will need to take the initiative and create the right environment in which your employees can think positively about cost efficiency. Businesses that are able to increase and sustain their focus on cost efficiency rather than just cost reduction will ultimately achieve more bang for their buck.
Laurie Bissonette, CA is a Partner with KPMG Enterprise™. She can be reached at 705-669-2521 or lbissonette@kpmg.ca .
To listen to a podcast that offers Entrepreneurs additional insight on how you can generate more cash for your growing company visit kpmg.ca/dialogueintheden and download Working capital. Raising the money at the right time.
