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Is your cash flow integrated?

Peter Metcalfe
integrated cash flow

The global financial crisis has meant that hundreds of companies are now facing a cash flow crisis.

So why are some businesses managing to weather the storm while others are finding themselves in a financially precarious position? Peter Metcalfe, partner at Oliver Wight Asia Pacific says what will distinguish the survivors from the strugglers is a disciplined approach...

Whether you're a local plumber or a multinational mining conglomerate, access to cash on a regular basis is one of the fundamentals of business continuity. In the past, if you got into a tight spot because sales were down or your debtors were slow to pay, you could usually go to the bank or your shareholders to get a top-up. Not so anymore - the lines of credit we used to rely on have dried up and potential shareholders are considering their investments with a lot more caution.

Ultimately, the amount of 'free cash flow' existing in your business will influence the short and medium term future of your company in today's economic environment. Companies that have strong reserves of cash will be able to sustain the volatility of consumer reaction and maintain their business focus to gain market advantage.

To ensure they have cash flow at every level of business operation, smart operators will follow a process of disciplined integration. Here's an outline of what you should consider to keep your cash flow integrated...

Cash for strategy

When you initially created your business strategy you had to make choices - choices about your product offering, the markets you wanted to participate in and the customers you wanted to build relationships with. All these decisions required you to ask questions about cash flow, such as how will you pay for business activities, where will the cash come from, and how will you keep your cash flow steady?

Successful companies keep abreast of their cash flow on a monthly basis and always reconcile any deviations against their strategic intent. Most importantly, their strategic horizons cover a minimum two-year period to provide owners, shareholders and key stakeholders with confidence that the business is heading in the right direction.

Cash for products and services

Successful businesses provide a solution for a customer need in the right place, at the right time, quality and price. They also innovate to keep their products relevant. But new product development can be costly so it's important to have a process for selecting winning ideas. Asking yourself the right questions can help avoid trouble later on, such as do you have a fully costed product development plan that covers the strategic horizon and do you have the cash to support the development?

Cash invested in ideas that don't see the light of day should be avoided. One way to do this is to review your new product pipeline every month and ensure you are investing in winning ideas. Constant monitoring of the current product portfolio via a disciplined management process, will allow you to satisfy market demand with a relevant product range and ensure that no obsolescent products and surplus stock are allowed to tie up precious cash.

Cash for generating demand

Businesses need to ensure all marketing and selling activities deliver a return on investment (ROI), including in-house and out-sourced activities. Often companies focus on discretionary expenditure such as advertising but a major investment of cash is also required for human resources. Make sure you know the role and objectives of all employees and assess their effectiveness regularly.

Remember, making the sale is only part of the equation. You also need to consider your payment terms. How frequently do you review the money your customers owe you? Successful companies review their sales forecasts and their debtors in the same monthly meeting to ensure they are not propping up their short-term sales by selling to bad debtors.

Cash for the supply chain

A huge cost component of all businesses, and one of the most complex areas to manage, is the cost of goods sold. If your planning and control processes are not robust then you risk investing large sums of cash in raw materials, packaging, plant and equipment, labour, storage and distribution, without any immediate return.

Successful companies reconcile the latest consumer demand against their supply capability and invest cash accordingly. They will view the demand for the next two years as a minimum and make tactical and strategic decisions to minimise cash investment and deliver superior customer service.

Are you cashed up?

If water is the essence of human existence then cash is the essence of business viability. Combining the financial outputs of your product management, demand and supply reviews and reconciling them against your business strategy will ensure that you keep a constant monitor on the health of your business and its all-important cash lifeblood.

If your senior executive teams are not engaging in a monthly integrated business management process then you run the risk of wasting cash - and who can afford to do that? Yesterday, money was a commodity - today it is a source of competitive advantage.

Peter Metcalfe is a partner at Oliver Wight Asia Pacific, leading specialists in integrated business management who educate, coach and mentor companies to achieve outstanding performance. Please send any comments or questions you have in relation to this article to: PMetcalfe@oliverwight-ap.com