Are we all responsible for the company's cash flow? Deciphering the cash culture
Cash culture... it's a concept that's gaining ground in many companies.
Contrary to what you might think at first glance, it does not characterize a simple cash flow optimization process. It's about going one step further, by giving every employee the desire to take action on a daily basis to achieve a healthy financial balance.
It has to be said that the stakes are high, given that liquidity problems have such a major impact on a company's long-term survival.
In this article, co-written with Eric Desquatrevaux, Managing Partner and founder of Avizo, you'll discover what cash culture is, and above all how to make it a priority for your employees.
What is cash culture?
Cash culture is both a process and a state of mind, which means that good financial and cash management should not be the sole responsibility of the CFO 😮💨. Rather, in a cross-functional approach, it's based on the idea that everyone should be empowered in this respect.
In other words, optimizing cash flow and prioritizing liquidity must be everyone's business.
As a result, managers, purchasing departments, sales teams... all are called upon to integrate into their day-to-day operations actions designed to secure the company's finances as far as possible. In other words, to encourage cash inflows and avoid losses and other late payments as much as possible.
💡 A well-known example is the cash culture applied to the sales department, which is asked to work on various levers, in particular:
- rigorous analysis of customers and prospects, to avoid bad payers and focus on more profitable accounts;
- a well-honed invoice dunning procedure.
Why is a cash culture important?
Ensuring the company's long-term future
Cash culture potentially affects all companies, not just those facing financial difficulties. When it comes to cash flow, prevention is better than cure!
Faced with a constantly changing economic environment, it's becoming difficult to predict everything. Recent events (Covid, inflation, etc.) have been the source of many financial problems for professionals.
In such a context, if you don't have sufficient liquidity, you run the risk of falling into a downward spiral, where you'll find it difficult to honor your suppliers, maintain your activities properly, and so on.
For example, the increase in late payments due to the economic crisis has unbalanced the cash flow of many organizations that were already in good financial health.
What's more, while it's important to pay attention to your results as well as your margin, it's cash that enables you to invest, and therefore grow your company. In short, your cash flow contributes to your sustainability.
A word from the expert
There's a direct link between good cash management and company valuation.
Cash management influences WACC (weighted average cost of capital), which depends on the cost of equity and debt.
Good cash management reassures lenders, offering better rates, and reduces the risk perceived by investors, thereby lowering the cost of equity.
Conversely, poor cash management increases the WACC, degrading future cash flow forecasts and reducing the company's valuation.
Involving every employee in cash management
In the cash culture, cash management must involve everyone, from management to operational staff. Otherwise, profitability and overall balance will be difficult to achieve.
However, maintaining healthy finances also benefits (no pun intended) employees. Not only do they play a role in securing cash flow, they can also enjoy a direct stake in the company's results.
Not to mention that preserving cash also means safeguarding their jobs in the long term.
The challenge of a cash culture
Even if the CFO remains the orchestra conductor of the cash culture, the main challenge facing him or her is to succeed in anchoring this state of mind in employees, to ensure that they adopt the right behaviors on a daily basis, in favor of balancing or even increasing cash.
It's a question of opening up cash-related challenges beyond the finance function alone:
- sales staff manage customer risk and prevent non-payment ;
- the purchasing department negotiates longer payment terms with suppliers to reduce working capital requirements;
- accounting analyses identify the items and actions that create the most value;
- production implements processes to improve productivity, and thus reduce collection times, etc.
☝️Au Beyond awareness, cash culture also defines a methodology, involving the implementation of concrete actions to manage cash effectively. Let's take a look at the main ones.
How do you establish a cash culture in your company?
Communicate sufficiently with employees
To ensure that every employee feels involved, the CFO needs to communicate sufficiently on the results, or simply on the benefits of a cash culture.
Your first task is therefore to raise awareness of these issues among business managers, and steer them in the right direction. If necessary, you will need to train certain employees in the concept of cash management and related best practices, with the aim of jointly identifying the levers for improvement that can be activated according to each person's business constraints.
☝️ This necessary communication also involves setting up rituals for sharing reports, fed by the right indicators, so that employees can easily monitor the state of finances: cash levels, outstanding receivables, etc.
Analyze and secure cash flows
Understanding and acting on the company's cash flows is one of the priorities of a cash culture.
There's no mystery to keeping your working capital requirement negative. You need to take action on :
- collection times. It's important to reduce your organization's DSO by implementing a solid customer risk management and debt collection process;
- disbursement times, by trying to lengthen them.
One of the best practices is to analyze current cash flows, but also to draw up regular cash flow forecasts, which are essential for anticipating cash inflows and outflows over the coming period.
Prioritize your cash management actions intelligently
All in all, there are many actions that can contribute to better cash management. But they can't all be carried out at once!
That's why we recommend that you prioritize them, favoring :
- quick-wins, i.e. operations synonymous with rapid gains and which can be deployed rapidly throughout the company. Taking the example of reducing collection times, this could involve implementing a new payment method (online payment rather than cheque, etc.), or automating customer reminders using software;
- tasks that fall within the remit of the Finance Department, to set an example. How else are you going to convince employees who feel less concerned?
In all cases, your various reflections will need to culminate in an action plan, which will be accompanied by KPIs designed to monitor your evolutions to revise your strategy if necessary.
💡 Some companies decide to call in a cash manager. If it's not possible for you to hire this type of profile, there's still the option of using an external service provider.
Reduce unnecessary expenditure
When it comes to optimizing cash flow, the focus is often first and foremost on cash management.
However, we suggest that you adopt a more frugal mindset at the same time, i.e. to ensure that less money goes out the door.
Of course, you don't want to jeopardize the smooth running of your business or the well-being of your employees. But you'd be surprised how many unnecessary expenses some companies incur:
- subscriptions to services that are no longer used ;
- business travel that could be avoided in favor of videoconferencing;
- energy wastage, etc.
💡Reducing costs also means taking another look at suppliers. In other words, try to lower purchasing costs by renegotiating your contracts, or even by playing the competition off against each other.
What solutions can help you deploy a cash culture?
To increase the efficiency of your cash culture, we recommend that you equip yourself with suitable software. These have the advantage of
- automate many processes (and that makes it easier to integrate cash culture into your teams' routines) ;
- provide you with an overview of your flows.
👉 So me examples of tools :
- Collection software, designed to streamline overdue management procedures. One example is Cash & Credit, a debt collection and credit management solution. With Cash & Credit, you can automate invoice reminders using customized scenarios, and take preventive and corrective action to reduce late payments. Cash & Credit also enables you to effectively arbitrate customer risk, so you can anticipate non-payment problems before they arise.
- Invoice dematerialization software is renowned for saving companies time and money in document transmission. As a result, they get paid faster, especially if the tool incorporates an online payment function.
- Cash management software. These are used to optimize cash flow monitoring and forecasting, providing greater visibility of a company's available liquidity and future needs.
Cash culture in a nutshell!
Faced with the ever-increasing challenges of cash management, a cash culture is the right answer for ALL companies. By giving a sense of responsibility to all employees, it enables us to influence a wide range of levers, with the aim of putting our finances on a sounder footing.
But cash culture is also, and above all, the deployment of concrete actions to increase available liquidity, to react promptly in the event of problems... and also to invest in the organization's future!
If you too would like to adopt a cash culture, you can rely on software that will help you to anticipate, make the right decisions quickly, and thus maintain your profitability over the long term.
Article translated from French