Can CFOs Control Cash Flow?
Cash is the lifeblood of every company. Cash flow, particularly incoming cash flow, largely determines your company’s ability to grow and respond to the market forces around you. Well-managed cash flow can even be a strategic advantage – just look at companies like Dell Computer, who are able to finance tremendous growth simply through their cash collection methods, which allow them to maintain a negative days sales outstanding (DSO) balance. This has also contributed to their strong margins and earnings per share.
But Dell is the exception to the rule. While CFOs have invested in demand planning, sales forecasting, and inventory management, they have been hesitant to embrace technology that directly affects their primary responsibility – to maximize cash flow inside the organization. Most CFOs struggle to accurately predict their cash flow, let alone control and manage it. To make matters worse, by the time your cash forecast tells you you’re about to miss your cash balance goal, it’s far too late to do anything about it. Maybe this is why cash reserves for F500 companies are abnormally high in 2004 – too much room for error, and not enough confidence to put that capital to work.
So how can a CFO better predict and control cash flow so they can reinvest in their business? Is it even possible? The answer is yes, but you have to rethink a few assumptions you use to run your business, just like Michael Dell did over 20 years ago.
For most CFOs, the most difficult part of cash flow to control is inbound cash flow, i.e., cash collected from customers. Outbound cash flow (cash paid to suppliers) can easily be accelerated or delayed by releasing/holding payments, and cash for operations can largely be managed through resource planning and supply chain software. But getting customers to pay consistently to meet your cash needs? That’s a much tougher exercise, and a common reason most cash forecasts are missed.
Take a closer look at your inbound cash flow processes, and you’ll get a better understanding of why it is so difficult to measure and control. If you’re like most companies, you have followed a process that hasn’t changed in decades:
Often finance departments spend most of their time on the 2 per cent of accounts that are delinquent, instead of wondering how they can improve cash flow on the other 98 per cent. A skeptical eye (such as Michael Dell’s) would focus on the 98 per cent and question the processes and assumptions behind them. Do we have to print and send invoices and process paper checks or could they be done electronically? Do different customers want different trade discount terms or is it truly “one size fits all”? Are trade discounts helping us achieve our cash flow goals, or are they just eating into our gross margins? Is it possible to create a process that better meets our customer needs as well as align with our near-term cash flow goals? Can we accurately control cash flow so we don’t miss a forecast?
Dell Computer’s well-managed cash flow is rooted in changing one assumption – would customers pay in advance for custom configured PCs, and if so, how could that be used to fund the growth of the company? Similarly, one changed assumption in your inbound cash flow processing could open many opportunities.
For example, what if all your invoices were sent electronically by notifying customers via e-mail that an invoice was available on your website? It sounds like a simple change, but similar to Dell’s breakthrough, it enables a whole new way to manage and forecast cash flow. Imagine you’re a CFO who has realized that he/she is not going to make their cash forecast, but you have an e-billing system. Instead of crossing your fingers, you could:
Combining your capabilities to control your inbound cash flow with a view into payables and treasury across the organization, you could address your cash needs from a central cash board by proactively managing flow in and out of your organization. Trade discounts would be tied directly to cash flow goals, and not adversely affect margins if not needed. By changing one simple assumption, the Chief Financial Officer can become the Cash Flow Optimizer.
As is the case with Dell, the simplest change of assumptions can often change everything about a business. Applying technology to maximizing cash flow provides leverage across your entire organization, and allows you to better fund growth while retaining margins. When optimized cash flow management can be a competitive advantage that will help make you the Dell of your industry.