Keeping an eye on the pennies can protect the pounds

Keeping an eye on the pennies can protect the pounds

Cash is king takes on new meaning in a downturn.

  • min read


Keeping an eye on the pennies can protect the pounds

Until recently, many senior executives regarded managing cashflow as mundane, but, as the financial crisis has choked off credit, cash management has become more strategic. Companies are finding it more difficult to secure outside funding, just when cashflows are harder to generate.

The resulting cash squeeze has sent some companies into bankruptcy, yet companies that manage cash and liquidity aggressively can use the data to gain an advantage in a downturn.

Corporate Renewal

In downturns, scenario plans built from cashflow and liquidity measures can show management teams how much cash they need to preserve the business under different conditions. The idea is to capture information on what is flowing into and out of each business segment on a weekly and monthly basis, and then compare those flows with budgeted amounts. Big variances raise red flags in product lines, routes to customers and vendor relations that need be addressed.

The accumulated data helps companies to understand how big changes in liquidity flow through to profit and loss. By running similar analyses on the cashflows of competitors, customers and vendors, companies can learn which rivals are vulnerable, which customers are strongest and which vendors might not survive. With reliable data, companies can make predictions and manage effectively through turbulence.

A large high-tech industrial group in Europe discovered that payment cycles in several older industrial equipment businesses had been stretched out as sales slowed and customers struggled with payments.

That tied up cash in mature parts of the business and prevented the company from investing in a competitive opportunity in renewable energy.

Managers tackled the problem by first examining the company's net working capital requirements by business line and function. Then they determined how long cash was locked up—from initial acquisition of raw materials to the last customer payment. When they compared those cash cycles against the competition, they discovered a wide gap in the efficiency of the company's accounts receivable, accounts payable and inventories in key segments. Rivals were collecting faster, stretching out their own payments and aggressively managing inventories. Closing that gap released more than 260 million in cash. That provided money to fortify the mature businesses against the downturn and capital to invest in the promising solar business. The moves were not radical: cracking down on collection, enhancing payment terms with suppliers and managing inventories better. The key was focusing managers' attention on cash management by circulating regular reports detailing changes in cashflows.

Managing for cashflow helps executives to hone strategy based on a full picture of how the business is performing. Armed with that vital information, managers can make informed choices and free capital to invest opportunistically throughout the downturn.

Patrick Manning is a leader in the performance improvement practice at Bain & Company, the consultancy. This was adapted from the forthcoming book Winning in Turbulence (Harvard Business Press).

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