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Ten Steps to End the Dash for Cash

Quick cash fixes at the end of fiscal years are frequently harmful.

Companies often make a dash for cash at the end of the fiscal year to produce a cash-flow statement suitable for framing. It generally works … at first. Delaying payments to suppliers, reducing stock levels and increasing collections all make working capital look better for a little while. Unfortunately, most of those gains don’t usually last into the first quarter.

Analysis_Bug3If this were a harmless distraction, like the annual Christmas party, it might be a tolerable waste of time and effort. But typically, as after a crash diet, the lost weight returns with a vengeance in the first quarter. Companies begin the year contemplating a dismal set of metrics, and the need to begin reducing appears all over again. Quick cash fixes are frequently harmful. They are stressful to the organization, harmful to customer service and supplier relationships, and even damaging to long- term profitability.

The key to making a sustainable dash for cash is to focus on the underlying processes that reduce working capital efficiency. In particular, companies should:

1. Ensure that collectors focus on the right customer accounts and employ strategic collection techniques — with the correct supporting measures and cash targets in place.

Dan Ginsberg

Dan Ginsberg, REL

2. Remove customer excuses for withholding payment by reducing the number of disputes and deductions caused by internally controllable issues, such as pricing, discount, substitution and quantity errors.

3. Carefully analyze and align payment terms for key customers.

4. Adjust payment terms and payment performance with vendors to ensure increased cash flow and compliance.

5. Revamp payment routines. Eliminate early payments to increase payment efficiency, and penalize vendors for poor process compliance in order to increase cash-flow generation and process efficiency.

6. Review inventory policies for key fast-moving seasonal items to ensure that excess stocks are reduced by year end.

7. Ensure that year-end plans take into account first-quarter needs and offer customers the option to accept year-end deliveries to maximize sales potential while reducing buffer inventory.

8. Understand which products are slow moving and at risk of obsolescence sooner so the inventory can be sold earlier, which minimizes the value of stock write-downs.

9. Link quantified functional performance measures and targets directly to year-end corporate working capital targets and identify the levels of monthly incremental performance needed to meet goals.

10. Check to be sure that an effective form of transactional reporting exists that can truly monitor the impact of working-capital decisions in the front line of the business, allow management to see the effects of working capital process changes and ensure the changes are sustained.

The devil is in the details, however, and these 10 steps must be executed with precision and experience. Calculating the gap between existing performance and a corporate target is not enough. Companies require expertise to analyze inventory, accounts receivable and accounts payable processes and performance, and identify and quantify the improvement opportunities. It’s also critical for companies to have a detailed implementation road map that allows scarce resources to be focused on the areas with the quickest potential for the greatest return.

Manipulating working capital numbers is expensive, hugely distracting and often harmful to the company, its customers and its suppliers. It’s far more productive to make structural changes that will steadily improve performance throughout the year — the kind of progress investors care about most. Warren Buffett’s mentor, Benjamin Graham, once stated, “In the short run the market is a voting machine, but in the long run it is a weighing machine.” Gaming metrics to beat analysts’ short-term expectations may plump returns in time for the new year  but only genuine improvements are rewarded in the long run.

Dan Ginsberg is an associate principal at REL Consultancy Group in North America where he focuses on total working capital performance improvement. 

2 thoughts on “Ten Steps to End the Dash for Cash

  1. Cash Flow Statement is one of the financial statement elements. Its disclosure.CFO are well aware and any component displacement is Misstatement.

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