Cash is King

Managing cash and working capital

Participated this morning in the best webinar I have listened to in recent weeks – the Australian Institute of Company Directors “Managing Cash and Working Capital in a Crisis”.  Best in that it was full of practical guidance.

From my perspective as an experienced CFO, the guidance isn’t just relevant in a crisis, but effectively talks to what best practice cash flow management would ideally look like all of the time, which places you well when the pressure is on.  It’s all part of building a resilient business.

Whilst we all know “cash is king”, it is not unusual for small businesses to not be on top of their cash flow management.

A few takeaways I wanted to share:

1. Improve visibility of the critical numbers
   • Most important thing is to have numbers you can rely on
   • A robust cash flow forecast is absolutely essential, and not a nice to have
2. Quickly strengthen the cash culture within the business
   • Talk cash across all levels of the business
   • Talk implications of actions and decisions on cash
3. Know what your potential scenarios and options are
4. Consider everything – don’t leave any stones unturned
   • go through everything in your P&L and balance sheet to see where you might be able to get some leverage
   • eg; debtor or inventory finance, sale & leaseback of assets

I’ll add one of my own. A valuable insight I learnt from Tony Howarth several years ago was that a sign of a good business is how quickly bad news travels to the top.  As the Director, Owner, CEO or CFO you want the heads up sooner rather than later. If you don’t know you have a cashflow squeeze until a sub-contractor calls you directly asking where his money is, there is something very wrong.

What does a good cashflow forecast look like?

1. It’s robust, accurate, reliable and can be updated quickly for changing scenarios. I learnt from my mistake here of engaging someone to build us a cashflow model. It was so complicated that none of us understood the formula to be able to amend it. We reverted to building our own Excel model that we all understood & could quickly update & amend.
2. Forecast at least 3 months ahead, ideally more and at various levels of detail. I am used to operating with a high level 12 months forecast, supported by detail for the upcoming month and even more specifics for the week & days ahead. This served us well to be have visibility on the peaks & troughs that get hidden in monthly numbers, & be able to manage them accordingly.
3. Ideally linked to your P&L and balance sheet, & other systems so that it reflects eg: the reality of your debtors collection cycles and your creditor payment terms, milestone billing points within contracts etc.
4. It’s built from the bottom up with detailed underlying assumptions that correlate to what is actually happening in reality, and not in theory.
5. Make it “bankable”
   • Early in my CFO career I was introduced by Frank Cooper to the concept of a “Bankable Budget”. A budget that the Bank would be happy with because it has 80% chance of being realised.  We used this concept a lot to test the credibility of our budgets. Bullshit and wishful thinking aren’t helpful.

Another key piece of advice from the AICD that I can relate to is to nurture relationships with your bank and use them as your first point of contact.  Find the best person you can within the bank who understands your business and is prepared to go into bat for you.   From my experience it made the world of difference. Ideally you want to be in a situation where your banking relationship protects you from the credit guys.   And I always found that having  proactive open communication with the bank served us well.  But there is a bit of an art in packaging your request, and information provided to the bank in a way that makes it easier for them to help you.

I am happy to share the handout from the webinar, and my own experience as a CFO with responsibility for managing cash in a large family business.  Please feel free to get in touch.