Improving Financial Performance With a Cash Culture - Part I
Part I - Building a Cash-Conscious Workforce and Culture
This four-part series was developed from the webinar How to Foster a Cash Culture and Improve Financial Performance. In each section below we have included a link to the video message provided by the speakers, brief summaries of the lesson and specific actions you can take to improve the cash culture in your business.
Establishing a Cash Culture: A Key to Improving Financial Performance
Steve Rosvold, Founder and CLO, CFO.University
Understanding Cash Flow is Key to Learning the Business:
Cash culture is critical for understanding a business’s operations. By following how cash flows through the business, CFOs can learn how all the moving parts are working, as all transactions begin or end with cash. In this segment I emphasize that analyzing a cash flow forecast report is a fundamental step for a new CFO to grasp the financial mechanics of the organization.
Action for CFOs: Make it a priority to examine and regularly update cash flow forecasts, ensuring a clear understanding of cash inflows and outflows. This approach will help identify potential financial constraints and opportunities for efficient cash management and better cash utilization.
Fostering a Cash Culture Unlocks Investments and Informs Financial Capacity:
A strong cash culture helps unlock and efficiently allocate cash for investments and growth opportunities. Understanding the organization’s cash capacity can prevent financial bottlenecks and ensure the business is ready to take advantage of significant investment opportunities without compromising liquidity. This 3 part series, CFO Success Series: Treasury kicks off with how to develop a capital plan as part of a strategic planning process.
Action for CFOs: To improve business performance establish robust cash management practices and maintain a clear view of the company’s cash capacity. This includes regular assessments of cash reserves, bank lines, and investment potential, allowing the business to strategically plan and execute growth initiatives.
The Power of a Cash Culture on Business Growth
Brian Jorgensen, Treasurer, Bose Corporation
Emphasis on Cash Conversion:
Brian highlights value of a mindset to achieve zero or negative cash conversion cycle to optimize business operations. This strategy enhances the free cash flow margin, allowing profits to be rapidly converted into cash. An effective cash culture ensures continuous reinvestment in the business, facilitating new product development and sustained growth. This may not seem attainable today, but if you start working on it today, imagine the possibilities.
Action for CFOs:
- Focus on minimizing the cash conversion cycle by tightening accounts receivable and inventory management practices working with vendors
- Analyze cash flow statements to identify bottlenecks and deploy automated solutions to streamline cash flow processes.
- Educate the executive team and operational staff on the critical importance of cash conversion to align company-wide goals with cash flow optimization strategies.
Aligning Executives and Operational Staff:
Brian emphasizes the power of aligning executives and operational staff around the concept of a cash culture. This alignment ensures that everyone in the organization sees the value in converting profits to cash and contributing to economic growth. Such harmony can turn a company’s growth into a significantly powerful and self-sustaining mechanism.
Action for CFOs:
- Foster a collaborative environment, creating educational programs to make cash flow management a shared responsibility across departments.
- Conduct regular workshops and performance reviews that focus on cash management efficiency and reward teams for achieving cash flow targets.
- Implement cross-functional teams to regularly monitor and discuss cash flow metrics, ensuring that cash culture is ingrained in the company’s operational ethos.
The Impact of a Strong Cash Culture on Long-Term Financial Health
Andrew Lee, Chief Financial Officer, RealWear
Importance of Managing Balance Sheet Elements:
Andrew highlights the significant role the balance sheet plays in strengthening cash culture within a company. By managing inventory, accounts receivable (AR), and accounts payable (AP) effectively, firms can avoid unnecessary capital raises. This approach ensures that businesses can leverage low-hanging fruits to unlock cash without affecting critical investments like R&D, Sales and Marketing.
Action for CFOs:
- Institute regular reviews of the balance sheet to improve on high inventory levels, outstanding AR, and low AP.
- Implementing strict cash management policies to ensure assets are efficiently utilized and cash flow is maximized.
- Establish a cross-departmental team focused on cash management practices can also enhance accountability and drive improvements.
Cost of Capital and Investment in Growth:
Andrew points out that capital for VC-backed companies is typically expensive, either through debt with unfavorable terms or new equity that dilutes current investors. By optimizing internal cash flows, companies can reduce dependency on external financing and mitigate dilution risks. This strategy enables firms to sustain valuable investments in growth areas like R&D without compromising financial stability.
Action for CFOs:
- Focus on internal cash generation initiatives to reduce the frequency of external funding needs.
- Launch efforts to streamline operational efficiencies and improve working capital management to free up internal funds for essential growth investments.
- Engage actively with board members and investors to align on long-term financial strategies that prioritize sustainable cash culture.
Fostering a Cash-Conscious Workforce
Timothée Clément- Agicap
Daily Cash Visibility
The importance of maintaining daily cash visibility is highlighted for finance-related roles such as CFOs and treasurers and non-finance roles, like the CEO. These key figures need real-time access to the company’s financial standing to make informed decisions. Other employees, like those in sales or procurement, receive cash performance updates less frequently, avoiding overload while still staying informed.
Action for CFOs:
- Implement Real-Time Reporting to ensure that CFOs, treasurers, and CEOs have access to real-time cash flow reports.
- Schedule Updates for Teams by having weekly or monthly cash performance updates for all staff who impact cash.
- Centralize your cash data analysis to streamline the analysis and make it more accessible and understandable for different teams.
Periodic Cash Performance Reviews
Timothée mentions that employees in departments such as sales and customer success should receive regular updates on their cash performance. These updates are vital in aligning individual and departmental actions with overall company financial goals. Regular reviews ensure that everyone is aware of how their role impacts the company’s cash flow.
Action for CFOs:
- Establish specific cash performance KPIs for each department.
- Schedule and maintain regular communication channels for sharing these updates.
- Set up a feedback mechanism to gather insights from employees on how these performance reviews can be improved to foster better financial awareness and action.
Fostering a Cash Culture: Beyond Saving Money
Steve Rosvold
Importance of Return on Capital:
Understanding the concept of return on capital is crucial for a healthy cash culture. It emphasizes that managing cash isn’t solely about saving money or cutting costs; it’s about ensuring the company has the resources available to invest in opportunities when they arise. A savvy approach to cash management allows the company to be agile and ready to leverage growth opportunities.
Action for CFOs:
- Conduct regular returns on capital analysis to understand where their investments are generating the best returns.
- Engage in strategic cash flow forecasting to ensure that there are adequate resources to capitalize on new opportunities as they present themselves.
Evangelizing Cash Literacy and Building Effective Systems:
Evangelizing about cash literacy is essential for fostering a culture that understands the strategic importance of cash. It is not just about having the processes and systems in place, but also about ensuring that everyone in the organization is knowledgeable about cash management. This holistic approach involves people, processes, and systems working together for optimum cash management.
Action for CFOs:
- Implement training programs to enhance cash literacy across all departments.
- Review and refine processes and invest in systems that provide real-time cash flow insights
These steps will help all team members understand and contribute to the company’s cash culture goals.
Driving Business Success: The Importance of a Strong Cash Culture
Brian Jorgensen, Treasurer, Bose Corporation
A primary focus on cash generation rather than profit generation is pivotal for maintaining a robust cash culture. Brian Jorgensen emphasizes the critical need for senior leadership and executives to prioritize cash flow, as it directly impacts the company’s ability to invest in new product development over simply managing working capital.
Action for CFOs: Enhance your business by aligning the leadership team with cash-focused KPIs, encouraging them to consistently monitor cash flow metrics, and making strategic decisions that prioritize cash generation for reinvestment opportunities.
Jorgensen highlights the importance of cascading goals and metrics that focus on cash through all levels of the organization. By ensuring that these metrics align with the company’s overall strategic objectives, businesses can maintain a robust cash culture that supports sustainable growth.
Action for CFOs:
- Develop a comprehensive plan that includes regular training sessions on cash management, setting department-specific cash goals, and incorporating cash metrics into performance reviews to keep the entire organization aligned with the cash generation focus.
- Facilitate better decision-making by conducting comprehensive ROI analyses for both working capital and product development projects. This will help ensure that the company’s investments align with strategic goals and foster long-term growth while maintaining sufficient cash reserves to support ongoing operations.
The CFO’s Role in Creating a Cash Culture - Cash Literacy
Steve Rosvold,
Importance of Teaching Cash Literacy
A key responsibility of the CFO and finance team is to teach cash literacy within an organization. Cash literacy involves understanding where cash is going and if it is being used in areas that provide high returns. Without cash literacy, departments may operate in silos, failing to understand how their decisions impact the company’s overall cash flow.
Action for CFOs: Implement comprehensive cash management training programs for all departments. These programs should include workshops and resources that explain the impact of their actions on cash flow. By ensuring everyone understands and respects cash use, CFOs can foster a unified approach to financial health.
Overcoming Poor Cash Culture through Leadership
A poor cash culture often stems from a lack of effective leadership and unclear policies and procedures. Departments may not communicate effectively, leading to inefficient cash management practices and missed opportunities for optimizing cash flow. Good leadership is essential in setting and enforcing clear policies around cash usage, which will help in maintaining a robust cash culture.
Action for CFOs:
- Establish and maintain clear, well-communicated policies regarding cash use.
- Facilitate regular cross-departmental meetings to ensure ongoing communication and alignment.
By taking these steps, CFOs can ensure all departments understand and adhere to best cash management practices, ultimately leading to a stronger cash culture within the organization.
Here is Part II in our series, Improving Financial Performance With a Cash Culture - Leadership and Cash Literacy
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