Last week we looked at the challenge of cash flow planning from a systems point of view, concentrating on the major classes of solution ranging from spreadsheets, cheap and cheerful forecasting tools to ERP systems, treasury management and performance management applications. But choosing the ‘right’ system, whilst helpful, is not the only facet of this multidimensional challenge. The cultural, people and process issues are just as important, says, Gary Simon, FSN’s managing editor.
Ask a senior manager how his performance bonus is computed and the chances are that he or she will come out with a range of scorecarding factors such as profit and contribution, customer satisfaction, team mentoring, staff satisfaction and variety of other ‘soft’ and ‘hard’ measures related to his or her industry sector and seniority. But who ever mentions cash?
In the current economy cash is the most precious commodity of all yet we pay scant regard to it in our management processes. It is simply not part of our profit oriented culture which places undue weight on the profit and loss account and not enough on the balance sheet. Self evidently the balance needs to be redressed. A two tier economy is beginning to appear with select public companies and global enterprises being able to access alternative sources of finance such as bond issuance and rights issues and the rest having to rely on traditional sources of bank finance that are ever more time consuming and costly to secure. It means that for the foreseeable future, liquidity is the primary concern – although some might argue it should always have been this way.
Turning the ship around will not be easy. Non-financial managers need to understand how their actions or inactions affect working capital and, performance measures that reflect the cost of capital need to be weaved into their scorecards. Take the management of debtors as an example. Late collections and poor credit control in one area increase financing costs for the entire business. So recognising and rewarding managers on cash collection is vital.
However, introducing a balance sheet oriented view of performance is not straightforward in a modern matrix structure. Divisional structures and other management hierarchies such as product grouping do not lend themselves to easy balance sheet analysis. Cost centres can straddle several legal entities and whilst it is straightforward to create a balance sheet for a statutory or legal entity it is often a challenge to do this for a management or virtual entity. So opening balance sheets are difficult to carve out of the statutory structure and by implication cash flow forecasting can become problematic – but not impossible.
The other significant process issue is that cash has to be managed in multiple time dimensions. Day to day cash is relatively easy though regularly consolidating the picture across a multi-national organisation with multiple banking relationships, terms and currencies can present added hurdles – which is where treasury management systems come into play. But cash is also tied to different tiers of finance (short, medium and long term loans) as well as major capital projects.
The need to look at major projects as a source of cash inflows and outflows often cuts across normal cash reporting. ‘Standard’ approaches to cash flow planning rarely allow cash to be viewed in this dimension other than through a standalone spreadsheet. And for certain industry sectors such as wine growers and oil exploration companies the time horizon for cash flow planning can extend to two decades or more.
Recognising these technical differences and nuances is critical to delivering a sound resolution to cash flow planning, but so is finding one person to take responsibility. Without a clearly defined organisational structure around cash management and forecasting then the whole process amounts to no more than a heap of beans.
Treasury management has always been something of a backwater and let’s not forget the tax director as well. Tax can be a very big number and where as it was a considerable outflow in the good years there is now, at least for some, the prospect of repayment. So bringing tax and treasury into the frame and ensuring collaboration with group finance is crucial to developing a robust business model and cash forecast. Local finance departments also need to be brought into the process and in many ways the management and collection of data should resemble the traditional group reporting process.
Finally, let’s not forget the business managers and non-financial staff. Introducing clearly developed performance measures and communicating them effectively, perhaps using scorecards, is vital to changing behaviour. The maxim “Cash is King” holds true in both good and bad times but after two decades of growth we now need to reacquaint ourselves with the basics of business life.
