Improving Financial Performance With a Cash Culture - Part II
Part II - Leadership and Cash Literacy
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. (If you missed Part I, refresh yourself here, Building a Cash-Conscious Workforce and Culture)
Corporate Leadership and Cash Literacy
Brian Jorgensen, Treasurer, Bose Corporation
Visibility and Management of Cash Flow
Brian Jorgensen emphasizes the importance of executive-level visibility into cash flow for driving cash conversion. He mentions their current approach ensures that executives responsible for cash flow have clear visibility into cash metrics. This enhanced visibility helps in making informed decisions that improve the company’s financial performance.
Action for CFOs:
- Ensure key executives have regular access to crucial cash flow data.
- Implement systematic reporting and data-sharing protocols to help in making timely and better-informed financial decisions.
These actions will help drive effective cash management across the organization.
Strategic Payment Practices
Brian discusses how their approach to handling payables has evolved to strategically manage cash outflows. By consolidating payments to once a week and carefully monitoring other factors the company can optimize its cash reserves. This balancing act involves understanding the needs and practices of vendors, thereby maintaining liquidity without jeopardizing supplier relationships.
Action for CFOs:
- Adopt a strategic approach to payment schedules by analyzing their specific business cycle and vendor relationships.
- Establish a disciplined, yet flexible payment routine will enhance cash management.
- Develop good communication lines with vendors about payment schedules to sustain critical supplier relationships.
Empowering Financial Literacy to Drive a Cash Culture
Steve Rosvold, Founder and CLO at CFO.University
Importance of Cash Literacy
Cash literacy is crucial for the entire company, from sales to procurement. Educating team members on the impact of cash flow, such as the implications of delayed collection or inventory management, ensures they understand how their actions affect the business’s financial health. By making financial concepts tangible through metrics like cash conversion cycles, employees can better appreciate and act on their roles in maintaining a positive cash flow.
Action for CFOs:
- Conduct regular training sessions to educate all employees, particularly those involved in cash-impacting tasks, on the significance of cash flow and related metrics.
- Implement visual dashboards displaying cash flow metrics and trends to help employees grasp the real-time impact of their efforts.
- Develop and distribute easy-to-understand resources that explain financial terms and concepts relevant to their roles.
Creating and Utilizing a Capital Plan
A well-structured capital plan is essential for managing future growth and funding needs. This includes understanding where the funding will come from, under which scenarios, and how to utilize various sources of capital effectively, such as vendor financing programs, bank debt or an equity raise. Proper planning and strategic thinking about capital use allow businesses to capitalize on growth opportunities while maintaining financial stability.
Action for CFOs:
- Develop a comprehensive capital plan based on the company’s business plan, detailing potential funding sources and scenarios for future growth.
- Regularly review and update the capital plan to ensure alignment with the company’s strategic goals and changes in the market.
- Engage with vendors and financial institutions to establish flexible financing options that can be tapped into as needed.
The Crucial Role of Finance Leaders in Cash Optimization
Brian Jorgensen, Treasurer, Bose Corporation and Andrew Lee, CFO RealWear
Addressing the Implementation Challenges of Cash Culture
When Brian Jorgensen took on the role of treasurer, his company lacked a focus on cash, often leading to excessive inventories and fast supplier payments. By benchmarking against industry leaders like Amazon and Apple, they identified gaps and set specific targets to align management teams towards cash optimization. Creating goals around cash conversion metrics such as DPO, DIO, and DSO proved successful in driving improvements.
Action for CFOs:
- Initiate competitive benchmarking to understand where your company’s cash management stands relative to industry leaders.
- Set measurable targets for key cash conversion metrics (DPO, DIO, DSO) and align your management teams to achieve these goals.
- Dollarize the impact of improvements on working capital to highlight the potential financial benefits and drive motivation.
Managing Enthusiasm in Startups to Avoid Cash Pitfalls
Andrew Lee emphasized the importance of having a finance leader to temper enthusiasm in startups, preventing over-ordering and poor inventory decisions. Startups might get carried away with excitement over new products, leading to mistakes such as excessive minimum order quantities. Finance leaders must act as the cautious voice, advocating for smaller initial orders to mitigate the risk of tying up too much capital in unsellable inventory.
Action for CFOs:
- Implement strict review processes for new product launches to avoid over-commitment and over-ordering.
- Use past errors in inventory management as case studies to develop robust guidelines and policies for future product development.
- Foster a balanced culture where finance leaders can express caution effectively without dampening innovation and enthusiasm.
The Importance of Setting Strong Financial Foundations Early
Andrew Lee, Chief Financial Officer, RealWear
Andrew Lee emphasizes the significance of disciplined working capital management regardless of the company’s funding source. It is crucial to set stringent rules and processes from the beginning to ensure that the company remains financially stable. For instance, managing inventory carefully and setting appropriate credit terms for customers can prevent future financial distress.
Action for CFOs: Implement rigorous working capital policies and foster a culture of discipline by regularly reviewing inventory levels, customer credit terms and vendor delivery/payment reports to ensure they’re aligned with the company’s financial health.
Long-Term Financial Planning Lee points out that early and proactive financial planning is essential to avoid cash flow issues and financial desperation. Having robust sales and operations planning (S&OP) processes in place can preclude scenarios where the company is stuck with unsellable inventory or unmet cash requirements. This planning ensures that financial resources are optimally managed to support business operations and growth.
Action for CFOs: Develop and enforce comprehensive S&OP processes, ensuring frequent reviews and adjustments based on market conditions and business needs to maintain a healthy financial state and avoid last-minute financial crises.
Building Financial Discipline: A Real-Life Case Study –
Andrew Lee, Chief Financial Officer, RealWear
Importance of Financial Discipline During Crisis Andrew Lee’s experience underscores the significance of financial discipline during times of crisis. When RealWear faced severe financial distress and their lender called their note, the company had to critically evaluate every expenditure to survive. This intense scrutiny and the resulting actions, such as tightening credit terms and negotiating longer payment terms with vendors, facilitated a remarkable turnaround in the company’s cash flow within a month.
Action for CFOs:
- Improve your business by proactively implementing stringent financial controls and regular expenditure reviews regardless of the company’s current financial health.
- Establish routines for close monitoring of cash flow, setting up an effective Standard Operating Procedure (SOP) for sales & purchases, and negotiating favorable terms with customers & vendors can prepare a company to handle financial challenges more effectively.
Leveraging Small Metrics for Significant Impact
Andrew Lee advises that even in the absence of a major crisis, using small, focused metrics can highlight areas for improvement and generate significant cash flow enhancements. By demonstrating how minor adjustments—such as improving inventory turnover or reducing days sales outstanding (DSO)—can positively impact cash reserves, organizations can foster a culture of continuous improvement and financial prudence.
Action for CFOs:
- Regularly analyze and present minor, actionable metrics to their teams to illustrate the potential financial gains. Examples include developing strategies to increase inventory turnover rates or reducing the average collection period for receivables.
Emphasizing the impact of these small changes can drive a culture of accountability and continuous financial optimization within the company.
Here is Part III in our series, Improving Financial Performance With a Cash Culture - Technology and Cash Management
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