How are best-in-class companies achieving greater visibility and control over cash and liquidity, and using this as a basis for increased profits? What role do software and systems play? What can you learn from this? FSN contributing editor Lesley Meall gets the low-down from Aberdeen Group analyst Nasreen Quibria.
When the going gets tough the tough get going. So when the credit crunch made access to short term borrowing prohibitively expensive, best-in-class companies changed their approaches to maintaining liquidity. “The need to gain greater financial visibility and control pushed cash flow to the forefront of corporate strategy,” observes Nasreen Quibria, an analyst with the Aberdeen Group, so the research company benchmarked the pursuit of this holy grail, to identify the processes, procedures, methodologies and technologies that characterise best practice.
Some of the findings are just what you might expect. ‘Day Sales Outstanding and accuracy of cash flow emerged as the two performance indicators that distinguished best-in-class,’ says Quibria. The top 20 per cent of the organisations benchmarked are notable for achieving DSO of 21 days (which is 32 days shorter than their peers), and managing to forecast their cash flow with 84 per cent accuracy (which is 35 per cent higher than their peers). Best-in-class are also much more likely than their less well-performing peers to use technology to enable and support these achievements; but it’s not just any old technology.
The best-in-class are 53% less likely to rely on manual systems and spreadsheets for cash management than their peers in the groups which performed to the industry average (made up of 50% of the sample) and the laggards, who were the worst performers, (and accounted for 30% of the sample). Companies with fragmented financial functions and systems have only a partial view of their cash, making it (relatively) difficult to predict their cash requirements, and although increased automation (and integration between systems and functions) can overcome this, the uptake of various “technology enablers” (see below) seems to indicate that some are more effective than others.
Given these differences, it is perhaps, unsurprising, that best-in-class performers are (44% ) more likely to be able to carry out detailed planning for short term cash and (123%) better able to monitor forecast accuracy than the laggards in (the 30% sample that makes up the) worst performing companies. The best-in-class are also (28%) more likely than their peers to align the treasury function as a strategic partner within the business, and they are more likely to be able to drill down into successive levels from a summary cash position. But as Quibria explains, as well as exploiting technology, the top 20% of performers also chose to invest in people.
“At one of the best-in-class companies, Coca Cola Enterprises, we found that they had invested in the education of their employees so that they were better able to manage credit control processes,” reports Quibria, and this does not mean just learning how to make better use of technology (though they did this too). It means studying for recognised professional qualifications with organisations such as the National Association of Credit Management (in the United States), and then putting what you have learned into practice, in alignment with corporate guidance and policies.
“After going on credit analysis courses they knew how to best monitor customers and reduce the risk to exposure,” she says, and CCE put “a lot more rigour into assessing the financial health of both its suppliers and their customers.” But as well as enhancing the knowledge of key credit and risk management staff, the credit department at CCE added headcount, and enhanced its evaluation tools. “CCE developed a dynamic model for each customer they felt was potentially at risk,” says Quibria, so although some became insolvent, the exposure to risk at CCE was minimal. In addition, CCE made some organisational and operational changes.
“Our suppliers did a lot of hedging for us, to fix input price costs,” says Sharon Petrey, the CCE corporate director of treasury, but with the adverse credit environment, some found this more difficult than others. “Certain direct materials exposure, previously managed by procurement, was handed over to treasury to hedge with financial instruments,” she explains, and although these hedges were entered into with some of the banks that CCE had long relationships with, the metrics were changed, and expanded. So as well as tracking bank ratings, CCE focussed on “credit default swap spreads, tier one capital and value at risk”.
As you might expect, CCE and other best-in-class companies were characterised by their use of electronic payment facilities. “We found that the highest performers had the highest use of systems such as electronic invoice payment and presentment,” says Quibria, to go along with their impressive (and relatively low) records for day sales outstanding – so they are not laggards when it comes to chasing their customers for payment. But as Quibria notes: “All of the best-in-class companies reported that their vendors are putting them under pressure to pay faster,” and their responses to this were so much of a surprise to Aberdeen that it needed to revise its assumptions on key performance criteria.
“In our original hypothesis we assumed the classic approach to cash management,” says Quibria, “which is collect early, pay late, and invest the residual for the greatest return with a manageable risk.” But while Aberdeen’s findings confirmed that top performers collect cash faster than their peers and have a higher degree of forecast accuracy, the results disproved the theory that best-in-class delay payment as long as possible. The world has changed. “Those with the lowest DSO also paid invoices more promptly, minimising late fees and lost discounts,” she reports, so they are much more focussed than lower performers on “keeping their finances stable.”
There was another surprise too, particularly for anybody who sees technology’s capacity to automate, integrate and streamline finance processes, and provide greater visibility into cash and liquidity, as a universal mandate for greater use of software and systems. Less automated approaches can also be effective. Although best-in-class performers are characterised by their use of the (non-spreadsheet) “technology enablers” listed above, and their ability “to minimise DSO, DPO, days inventory and forecast cash flow with accuracy”, the research makes the point that these things are not mutually inclusive.
“While it is much easier to measure these KPIs using enterprise applications, even manual processes can achieve a reasonable level of measurement. The lack of automated methods does not preclude companies from measuring simple cash metrics,” states Aberdeen. So organisations that want to achieve best-in-class performance should strive for maximum visibility into cash and the financial supply chain (including customers and suppliers), and establish collaborative formal cash flow forecasting practices, and improve their accuracy by involving more than just finance; but how they achieve this, is a lot less significant.
Given these differences, it is perhaps, unsurprising, that best-in-class performers are (44% ) more likely to be able to carry out detailed planning for short term cash and (123%) better able to monitor forecast accuracy than the laggards in (the 30% sample that makes up the) worst performing companies. The best-in-class are also (28%) more likely than their peers to align the treasury function as a strategic partner within the business, and they are more likely to be able to drill down into successive levels from a summary cash position. But as Quibria explains, as well as exploiting technology, the top 20% of performers also chose to invest in people.
“At one of the best-in-class companies, Coca Cola Enterprises, we found that they had invested in the education of their employees so that they were better able to manage credit control processes,” reports Quibria, and this does not mean just learning how to make better use of technology (though they did this too). It means studying for recognised professional qualifications with organisations such as the National Association of Credit Management (in the United States), and then putting what you have learned into practice, in alignment with corporate guidance and policies.
“After going on credit analysis courses they knew how to best monitor customers and reduce the risk to exposure,” she says, and CCE put “a lot more rigour into assessing the financial health of both its suppliers and their customers.” But as well as enhancing the knowledge of key credit and risk management staff, the credit department at CCE added headcount, and enhanced its evaluation tools. “CCE developed a dynamic model for each customer they felt was potentially at risk,” says Quibria, so although some became insolvent, the exposure to risk at CCE was minimal. In addition, CCE made some organisational and operational changes.
“Our suppliers did a lot of hedging for us, to fix input price costs,” says Sharon Petrey, the CCE corporate director of treasury, but with the adverse credit environment, some found this more difficult than others. “Certain direct materials exposure, previously managed by procurement, was handed over to treasury to hedge with financial instruments,” she explains, and although these hedges were entered into with some of the banks that CCE had long relationships with, the metrics were changed, and expanded. So as well as tracking bank ratings, CCE focussed on “credit default swap spreads, tier one capital and value at risk”.
As you might expect, CCE and other best-in-class companies were characterised by their use of electronic payment facilities. “We found that the highest performers had the highest use of systems such as electronic invoice payment and presentment,” says Quibria, to go along with their impressive (and relatively low) records for day sales outstanding – so they are not laggards when it comes to chasing their customers for payment. But as Quibria notes: “All of the best-in-class companies reported that their vendors are putting them under pressure to pay faster,” and their responses to this were so much of a surprise to Aberdeen that it needed to revise its assumptions on key performance criteria.
“In our original hypothesis we assumed the classic approach to cash management,” says Quibria, “which is collect early, pay late, and invest the residual for the greatest return with a manageable risk.” But while Aberdeen’s findings confirmed that top performers collect cash faster than their peers and have a higher degree of forecast accuracy, the results disproved the theory that best-in-class delay payment as long as possible. The world has changed. “Those with the lowest DSO also paid invoices more promptly, minimising late fees and lost discounts,” she reports, so they are much more focussed than lower performers on “keeping their finances stable.”
There was another surprise too, particularly for anybody who sees technology’s capacity to automate, integrate and streamline finance processes, and provide greater visibility into cash and liquidity, as a universal mandate for greater use of software and systems. Less automated approaches can also be effective. Although best-in-class performers are characterised by their use of the (non-spreadsheet) “technology enablers” listed above, and their ability “to minimise DSO, DPO, days inventory and forecast cash flow with accuracy”, the research makes the point that these things are not mutually inclusive.
“While it is much easier to measure these KPIs using enterprise applications, even manual processes can achieve a reasonable level of measurement. The lack of automated methods does not preclude companies from measuring simple cash metrics,” states Aberdeen. So organisations that want to achieve best-in-class performance should strive for maximum visibility into cash and the financial supply chain (including customers and suppliers), and establish collaborative formal cash flow forecasting practices, and improve their accuracy by involving more than just finance; but how they achieve this, is a lot less significant.
