Why It Pays Take a Deeper Look at Your Cash Management Process

Managing cash in an enterprise business is complicated. But the concept of having cash on hand in the right amounts, allocated in the right places, and maxing out its potential is simple. So, how do you get to this optimal state?

We break down the details and look at the options here.

A Cultural Shift

According to Deloitte.com, businesses that manage cash effectively have created an organization-wide culture that goes beyond prioritizing cash flows to free up cash. "It means encouraging financial and cash flow discipline."

As you might imagine, this cultural shift must come from the top with management's buy-in and stamp of approval. Leadership sets overall cash flow objectives, establishes the policies to achieve them, and designates individuals responsible for meeting them across the organization.

This makes cash flow an organization-wide effort that reaches well beyond just finance. It also gives operations, sales, marketing, production, procurement, payment, and other divisions a chance to contribute.

According to Deloitte, "to drive this point home, many leading companies actually link staff compensation to achieving specific cash flow targets."

A Nod to What Works

When you combine a cash management culture with industry best practices, you begin to tap the potential of a comprehensive approach. Some critical best practices, as outlined by Deloitte, include:

Centralizing Key Functions. Centralizing accounts receivable and accounts payable processing through a center of excellence that enforces common standards.

Automating Processes. Automating cash management processes and adopting key performance indicators (KPIs).

Leveraging Technology. Delivering invoices electronically rather than by email to accelerate billing and collection. Moreover, incorporating a vendor portal so vendors can review invoices, make payments and resolve disputes.

Optimizing Functions. Focusing on minimizing error rates on invoices and adopting a follow-up collections schedule that ensures equitable and timely payment requests or late fees.

Forecasting. Looking at income and cash flow statements to better understand working capital metrics from balance sheets, such as DIO (days inventory on-hand), DSO (days sales outstanding), and DPO (days payables outstanding).

Matching Funding to Obligations. Balancing short- and long-term cash flow obligations to match funding sources to capital flows, ensuring adequate cash to meet ongoing obligations.

An Enterprise Perspective

Cash management complexities arise as the scope of your enterprise changes. Growth, acquisitions, contractions, and other influencing events can impact your outlook. Therefore, it's key to remember to keep a high-level view.

According to Deloitte.com, doing so can help you address the challenges that come with:

• Understanding how cash flows throughout the enterprise and how they impact various divisions and cash management.
• Establishing benchmarks you can use to gauge the effectiveness of internal and external practices.
• Matching capital spending plans with the cash resources required to fund them.
• Allocating cash appropriately among enterprise locations and assisting those experiencing cash flow shortages.
• Incentivizing the adoption of best practices regarding cash generation and preservation.
• Streamlining collections across locations to minimize the time cash is tied up in transit.
• Optimizing short- and long-term cash and capital flows to align with debtors and creditors.
• Making working capital performance a barometer of executive compensation.
• Understanding how factors like interest rates or sales volumes might influence cash flow.

Committing to Success

Instilling a cash management culture, adopting best practices, and taking an enterprise view takes a lot of work. It's not something you can achieve in a staff meeting or even a week-long retreat.

It requires a sustained effort that will likely consist of forward movement and an occasional backward step. If you think of it like a high tide that progresses while individual waves move forward and back, you're on the right track.

According to Indeed.com, you can ride the tide to success by keeping the following tips in mind:

Create Your A-Team. Enlist top performers from each division as you work to instill a cash management culture from the top down. These individuals with experience collaborate well and bring a passion to the table that moves others, and your initiative, forward.

Designate Roles. Give your team members roles that play to their strengths and assign responsibilities accordingly. When doing so, create a hierarchy, so employees understand where to go with questions or when issues arise.

Flex to the Finish. Be flexible and know that the complicated cash management process will be subject to changes now and then. When they occur, adapt and keep moving forward.

Cash management is one of the most critical factors in an enterprise business's success. By adopting the approach outlined here, you'll increase your chances.