Disruption in economic activity can lead to all sorts of business crises. But, fortunately, as the divisional and group CFO Gary McGaghey explains, businesses facing liquidity challenges can take steps to accomplish cash excellence and overcome these challenges.
Chief financial officer explains: What is cash excellence?
Cash excellence is the process of building a strong, long-term cash culture through practices that improve your cash and liquidity management. From improving your business’ systems, to inspiring your employees to adjust their mindsets, and implementing no-regrets actions that weave cash excellence throughout all operations, you can shift from cash preservation to cash excellence and improve your competitive advantage.
Gary McGaghey: How can CFOs prepare a business for cash excellence?
The CFO can play an essential role in preparing a business for cash excellence by laying the groundwork for a strong cash culture to infiltrate the business from top to bottom. Gary McGaghey explains that CFOs can lay this groundwork by fostering a cash-focused culture across the business’ people, structure, and processes.
Here’s how a CFO can nurture a cash-focused culture in each of these three dimensions.
1. Cash focused team culture
Contrary to common misconception, cash management isn’t solely the finance team’s responsibility. Gary McGaghey emphasises that wider management should take responsibility for cash performance, too. And businesses can adopt aligned incentives to help a wider range of individuals share in cash management duties.
However, an effective cash culture must begin at the top of the business. Therefore, it’s often the CFO who must select the strategies the company will apply to manage cash effectively. Their decisions can communicate the importance of cash in company priorities, such as value creation or ensuring resilience during uncertain periods.
For example, a CFO’s decision to allocate capital to investment in future growth could demonstrate to the wider team that the business values capital efficiency metrics, such as the cash conversion cycle, as much as it does profit and loss metrics.
2. Cash focused structure
A business’ management and finance teams should discuss cash and set accountabilities regularly. They should also work to a structure, determined by managers, that discourages activity that only concentrates on improving quarterly or year-end figures. Gary McGaghey explains that these managers should allocate decision rights to employees throughout the staff hierarchy and develop an escalation structure so the CFO can manage matters that have substantial cash implications.
To realise a focused governance structure, management and finance teams can engage in meetings in a ‘cash war room.’ During these meetings, which the CFO should chair, the CFO can review the daily cash balances and pinpoint areas for quick cash improvements.
3. Cash focused processes
To shape cash-focused processes, managers should set and monitor clear key performance indicators (KPIs) at the right levels. As an example, front-line workers may be responsible for meeting operational KPIs — such as early and late payments and the percentage of overdues — while top-level managers may be responsible for the cash conversion cycle, return on invested capital (ROIC), and working capital as a percentage of sales.
Management should also craft a clear cash-reporting system across all entities, and all stakeholders should be able to access this system. Gary McGaghey recommends that leadership teams leverage digital tools to make this system efficient. Such tools could include those that automate repetitive order-to-cash, back-office, and procure-to-pay tasks and those that enable real time financial reporting systems for cash KPIs.
How can CFOs accomplish cash excellence?
Once the CFO, finance team, and wider management team have prepared the company to achieve cash excellence, the CFO can begin the company’s transformation of its cash preservation efforts into structural cash levers. They can kickstart this transformation by focusing on the following four elements of cash excellence.
1. Improve cash flow from accounts receivable
Businesses can improve the cash flow from accounts receivable by implementing three key strategies: manage overdues, standardise payment terms and set effective customer onboarding procedures, and strengthen collaboration between teams.
Businesses can improve the ways that they manage overdues by creating customer credit rating systems with maximum payment terms, maximum credit exposure, and clear pricing policies. Gary McGaghey explains that such a system can help a business onboard new customers and guide current customers. These systems should also be accessible to sales teams and credit and collection teams.
Another way to improve the management of overdues is to prevent these in the first place. A cross-functional team can review the end-to-end process from a problem-solving point of view to identify the issues that lead to repeated overdues. They may also implement advanced analytics tools to enhance their overdue collection strategies. For example, these tools may use inputs like past payment behaviours and company financial health to forecast a company’s likelihood of paying overdues without the collection team intervening.
Standardise payment terms and set effective customer onboarding procedures
Standardising all customers’ payment terms can minimise errors while making the order-to-cash process more efficient. Meanwhile, effective onboarding processes typically involve control measures that ensure the majority of customers opt into standard payment terms.
Gary McGaghey encourages businesses to set standard payment terms globally. That said, businesses may run into circumstances where they need to adjust the terms for customer groups because of certain market conditions. Businesses should understand the payment terms that are typically the norm in a certain industry and country and adjust these where required.
Once the business has finalised a standard policy, finance and sales teams should replace non-compliant terms with standard terms.
Strengthen collaboration between teams
Businesses can strengthen collaboration efforts between operations, project management, sales, and invoicing teams to avoid communication lags and delays that can disrupt the invoicing process. These disruptions often occur where there is a need for manual invoicing, such as projects that have multiple invoice dates linking to different milestones.
2. Alleviate cash flow challenges and improve flexibility
When it comes to managing supply chain disruption and liquidity issues, companies that have preserved cash effectively can often alleviate cash flow challenges and pay suppliers earlier. This often isn’t possible for companies that have poorer cash flow. Companies can change up their processes in three areas to improve flexibility: supplier management, payment terms, and procure-to-pay processes.
Gary McGaghey explains that with an effective supplier-management system, a company can share information on suppliers’ enterprise risk and previous performance on reliability, quality, code of conduct, and price. Payment and procurement experts use one integrated platform to support negotiations on pricing and payment terms and identify substitute sourcing plans where required.
Standardising payment terms on the supplier side can help a company improve the efficiency of its accounts payable and procure-to-pay processes. Lots of companies have global standard payment terms for suppliers, but many also experience different degrees of compliance with these terms.
Gary McGaghey notes that companies should collaborate with suppliers when extending payment terms to avoid losing momentum on standardisation. They may introduce exception processes through which suppliers can apply for an exception to the standard terms where required. The CFO or chief procurement officer would need to approve these processes.
Gary McGaghey encourages companies that seek to build trusting relationships with suppliers to pay on time and position themselves as reliable. To support this positioning, companies can leverage technologies like robotic process automation to minimise human error and the costs associated with their payment processes.
3. Recalibrate inventory management strategies
When companies experience disruption in supply and demand, they may see fluctuation in their inventory levels. In this case, Gary McGaghey emphasises the importance of recalibrating your inventory management strategies while maintaining resilience in the supply chain.
Companies that need to improve visibility and collaboration throughout the supply chain may adapt their supply chain strategies in line with their evolving business models and revisit their inventory strategies. As an example, a retail company that is seeing e-commerce growth may adjust their warehouse locations and stock-keeping rules and reduce its inventory levels through inventory pooling.
Retail companies may also make the most of technologies and tools like blockchain and the Internet of Things (IoT) to improve supply chain visibility. With real-time visibility, managers can quickly make informed decisions on which inventories to repurpose or stock up based on current demand.
Furthermore, companies can improve supply chain visibility by nurturing their supplier partnerships and ensuring these are as transparent as possible, perhaps by sharing data and information on inventory levels and contracting models.
Additionally, companies can carry out frequent reviews of their supplier bases to identify how to optimise supply chains and which suppliers to collaborate with.
4. Manage capital expenditures
Managing capital expenditures (capex) is also important to accomplishing cash excellence. Gary McGaghey notes that companies should focus on capital allocation and capital productivity to enhance their competitive advantage during periods of recovery.
Companies can implement an agile capital allocation process during uncertain times to reallocate funds strategically. Usually, the companies that reallocate funds outperform those that don’t. They can rank investment requests using a common metric, such as present value over investment. With this approach, companies can gain a broader view of the overall investment portfolio, allowing the rigorous allocation of capex to investments that offer the highest returns on investment.
Companies should also assess completed projects to analyse their productivity and identify the best practices for completing projects within the budget and by the deadline. From here, they can develop structural systems that help them apply best practices to other projects in future.
Put your business in a strong position
With these three cash excellence preparation steps and four cash excellence strategies, you can help your business improve its competitive advantage and put it in a strong position to thrive when liquidity challenges arise.
About Gary McGaghey
As the CFO of the €1.3 billion end-to-end marketing production and business services group Williams Lea Tag, Gary McGaghey manages the company’s execution of commercial plans. He focuses heavily on cash generation and oversees key investment decisions that aim to maximise Williams Lea Tag’s holdings. Before taking on this role, Gary McGaghey managed a high level of growth, both organic and M&A-driven, for a range of private equity, listed, and privately owned companies across a variety of sectors.