Putting Cash First: The Secret To Business Resilience

In the current business climate, across all industries, the alchemy of success is complex and multifaceted. Some factors are within the company’s control, such as offering products people actually want to buy, beating competition on price, and employing a talented and efficient labor force.  Other factors include elements beyond the CEO’s grasp, such as the capricious nature of inflation, increasing interest rates, supply chain disruptions, and geopolitical crises, which can make or break many businesses.

Amidst this labyrinth of challenges, there remains an incontrovertible cornerstone of corporate endurance: liquidity. Cash is the sine qua non for navigating market volatility, ensuring that a company not only survives but thrives.

But here’s the problem: most businesses are built on a P&L culture where sales rule. Unfortunately, that means that things can get out of control very fast. For example, salespeople might agree to all sorts of questionable terms and conditions in order to close the deal. Purchasing might chase the lowest cost for material, but in doing so, agree to overly large quantities with excruciating long lead times. Manufacturing can operate plants most efficiently through long run cycles—running equipment at capacity, causing investment in inventory to balloon. There are many kinds of trade-offs that companies need to make to keep equilibrium between the P&L and the balance sheet. Unfortunately, many of the decision rights for those trade-offs are scattered around the organization and are being made by individuals without insight into downstream effects.

Because most organizations have historically been more focused on revenue growth and profitability, cash considerations are frequently an afterthought. Bringing about changes beyond the incremental, and ensuring that these changes are sustainable, will likely require a concentrated intervention through the formation of a cash leadership office (CLO).

A CLO can help an organization identify opportunities to improve. I like to refer to this as the art of the possible. How effective and efficient can an organization be at generating and preserving cash from operations? There are seven important aspects of this approach:

1. Strategy. The first step to creating a cash culture is mapping out what the company’s cash needs will be going forward. Sadly, most businesses start with their current operating cash performance and then someone in finance asks operational stakeholders if they can improve by a certain percentage. “Can we shave a few days off inventory?” “Think we can collect a bit faster?” This approach is not at all transformative. If you identify the capital you will need, the debt you have to repay, headwinds you foresee as inflation increases, you can then start the discussion with a strategic target.

2. Opportunity identification: Once you know your cash needs via your strategy alignment, you then need to find ways to fund. Give the CLO the tools and resources needed to conduct analysis. In-depth review will facilitate fact-based discussions and help prioritize improvements. This should include such areas as tax, licenses, real estate and benefits funding.

3. Initiative management. Follow-through is something most organizations struggle with. It’s vital that the initiatives deliver the forecasted value creation on time and on budget. Create common charters for the initiatives so that progress can be tracked. There should be benefit measurement milestones and mitigation plans if teams fail to meet the targets. Pay close attention to establishing a baseline at the start of the initiative and ensure that the way it will be measured translates into cash.

4. Metrics and reporting. It is critical to align metrics and use them to drive results. Contrary to some conventional wisdom, more is not always better. The CLO will need to roll out meaningful metrics and KPIs.

5. Incentives. The CLO should review compensation incentive packages and recommend to leadership ways to better align. One idea is to pay sales commissions only on cash collected versus signed contracts. You want the compensation to drive intended outcomes.

6. Communication and training. This is one area almost all organizations shortchange and then really regret doing so later. The team needs to know why you are doing things differently and how they fit into the effort. This must be reinforced several times in order for it to be absorbed. Even finance teams below the senior leaders often don’t really understand cash levers. The CLO needs to develop and implement robust change management programs if you want to sustain results.

7. Business operating model. An effective CLO should work itself out of business in three to five years. You really want the business to put cash on equal footing with cost and revenue. To do that will require a lot of effort.

As you establish your cash leadership office, be sure to get consensus from the C-suite leadership team. If you truly want to create a cash culture generating transformational results that are sustainable, then you must be aligned and commit to the journey ahead. Take an honest assessment of your organizational readiness for a CLO effort. Are you willing and able to burn the ships in the harbor or do you need to proceed more cautiously and take an incremental approach?

Identify a leader who can run the CLO. This person should be well respected by the business and know how to drive results. It’s an ideal job for an executive who likes a good challenge and can be a perfect opportunity for them to demonstrate their leadership capabilities to the C-suite and board. Plan for controversy and trade-off decisions. Ensure that you and your CFO provide air cover to the CLO team and discuss in advance how to manage through difficult situations.

Finally, consider at the outset setting a timer for the CLO. True transformation for large global organizations will take at least three years, but likely should be wrapped up within five years. A preset timer helps advance a sense of urgency. Don’t skimp on training, communication and change management. Making one-time improvements that are not sustainable is counterproductive. Be sure that your team has the tools and resources to chase continuous improvements.