In today's business environment, the alchemy for success in any industry is complex and multifaceted. Several factors are within a company's control, such as offering products that people actually want to buy, competing on price, and hiring a competent and efficient workforce. Other factors include factors beyond the CEO's grasp that determine the success or failure of many businesses, such as the fickle nature of inflation, rising interest rates, supply chain disruptions, and geopolitical crises.
Amid this labyrinth of challenges, there remains an indisputable cornerstone of corporate staying power: liquidity. Cash is absolute condition We weather market fluctuations and ensure your company not only survives, but thrives.
But here's the problem. Most companies are built on a P&L culture where sales dominate. Unfortunately, that means things can quickly get out of control. For example, salespeople may agree to all sorts of questionable terms and conditions in order to close a deal. Purchasing managers may seek the lowest cost for materials, but in doing so they end up agreeing to excessive quantities with unbearably long lead times. Manufacturers can run their factories most efficiently through long operating cycles. This means you can run your equipment to maximum capacity and increase your inventory investment. Companies must make various types of trade-offs in order to maintain a balanced profit and loss and balance sheet. Unfortunately, many of the decisions regarding these tradeoffs are dispersed within the organization and made by individuals who do not understand the downstream impacts.
Most organizations have historically focused on revenue growth and profitability, so cash considerations often take a backseat. Bringing changes beyond incremental changes and ensuring that these changes are sustainable will likely require intensive intervention through the establishment of a Cash Leadership Office (CLO).
CLOs help organizations identify opportunities for improvement. I like to call this the art of the possible. How effectively and efficiently can an organization generate and maintain cash from its operations? There are seven key aspects to this approach.
1. Strategy. The first step in building a cash culture is to plan what kind of cash your company will need going forward. Unfortunately, most companies start with current operating cash performance, and then finance personnel ask management stakeholders if it can be improved by a certain percentage. “Can you reduce your inventory by a few days?” “Do you think you can collect it a little faster?” This approach is not transformative at all. Once you identify the capital you need, the debt you need to repay, and the expected headwinds from rising inflation, you can begin the discussion with strategic goals.
2. Identify opportunities: Once you know your cash needs through adjusting your strategy, you need to find a way to raise the funds. Provide CLOs with the tools and resources they need to perform analysis. A thorough review fosters fact-based discussion and makes it easier to prioritize improvements. This should include areas such as taxes, licensing, real estate, and welfare funding.
3. Initiative Management. Follow-through is something most organizations struggle with. It is important that initiatives deliver the predicted value creation on time and within budget. Create a common charter for your efforts so you can track your progress. Benefit measurement milestones and mitigation plans are needed if the team doesn't meet its goals. Pay close attention to establishing a baseline at the beginning of your efforts and ensure that the way you measure it leads to cash.
4. Metrics and Reports. It's important to align your metrics and use them to drive results. Contrary to some conventional wisdom, more is not always better. The CLO needs to develop meaningful metrics and his KPIs.
5. Incentives. CLOs should review compensation incentive packages and recommend to leaders how to better align them. One idea is to pay sales commissions only on cash collected for signed contracts. Rewards are needed to bring about the intended results.
6. Communication and Training. This is one area where almost all organizations fall short and really regret it later. Your team needs to know why you're doing things differently and how it fits into the effort. You will need to reinforce it several times to absorb this. Even finance teams below senior leadership often don't have a good understanding of the cash lever. If CLOs want to maintain their success, they must develop and implement a robust change management program.
7. Business Operating Model. An effective CLO should be out of business within 3-5 years. Companies really want cash to be on equal footing with costs and revenues. It will take a lot of effort to do so.
When establishing a cash leadership office, be sure to get buy-in from your executive leadership team. If we truly want to build a cash culture that produces sustainable and transformative results, we need to be aligned on our future efforts. Honestly assess your organization's readiness for a CLO journey. Do you have the will and ability to burn ships in port, or should you proceed more cautiously and take a gradual approach?
Identify leaders who can run your CLO. This person must be respected by the company and know how to drive results. This is an ideal job for executives who enjoy a challenging challenge and provides a great opportunity to demonstrate your leadership abilities to executives and the board. Plan for disputes and trade-off decisions. Be sure to discuss in advance how you and her CFO will provide air cover for her CLO team and navigate difficult situations.
Finally, consider setting a timer for your CLO first. True transformation of large global organizations takes at least three years, but he should probably be done within five. Pre-set timers help increase the sense of urgency. Don't neglect training, communication, and change management. Unsustainable one-time improvements are counterproductive. Make sure your team has the tools and resources to pursue continuous improvement.
