Are we all responsible for the company's cash position? Deciphering the cash culture
Cash culture is a concept that is gaining ground in many companies.
Contrary to what you might think at first glance, it's not just about optimising cash flow. It's about going one step further, by giving every employee the desire to take action every day to ensure a healthy financial balance.
It has to be said that the stakes are high, given that cash flow problems have such a major impact on a company's long-term survival.
In this article, co-written with Eric Desquatrevaux, Managing Partner and founder of Avizo, you can find out what a cash culture is, and above all how to make it a priority for your employees.
What is cash culture?
Cash culture is both a process and a state of mind, which means that sound financial and cash management should not rest solely on the shoulders of the CFO 😮💨. Rather, in a cross-functional approach, it is based on the idea that everyone should be made accountable in this respect.
In other words, optimising cash flow and prioritising liquidity must be everyone's business.
As a result, Directors, Purchasing Managers, Sales Departments, etc. are all invited to incorporate into their day-to-day operations actions designed to secure the company's finances as far as possible. In other words, to encourage cash inflows and avoid losses and other late payments as much as possible.
💡 A well-known example is the cash culture applied to the sales department, which is asked to work on various levers, in particular :
- rigorous analysis of customers and prospects, in order to avoid bad payers and focus on more profitable accounts ;
- a well-honed procedure for dunning invoices.
Why is a cash culture important?
To ensure the company's long-term future
The cash culture potentially affects all businesses, not just those facing financial difficulties. When it comes to cash flow, prevention is better than cure!
Faced with a constantly changing economic environment, it is becoming difficult to predict everything. Recent events (Covid, inflation, etc.) have been the source of many financial problems for professionals.
In such a context, if you don't have enough cash, you run the risk of falling into a downward spiral, where you'll find it difficult to honour your suppliers, maintain your activities properly, etc.
For example, the increase in late payments due to the economic crisis has unbalanced the cash flow of many organisations, even though they are in good financial health.
What's more, while it's important to pay attention to your results as well as your margins, it's cash that enables you to invest, and therefore grow your company. In short, your cash flow contributes to your sustainability.
A word from the expert
There is a direct link between good cash management and company valuation.
Cash management influences the WACC (weighted average cost of capital), which depends on the cost of equity and debt.
Good cash management reassures lenders, offering better rates, and reduces the risk perceived by investors, thereby lowering the cost of equity.
Conversely, poor cash management increases the WACC, worsening future cash flow forecasts and reducing the company's valuation.
Involving every employee in cash management
In the cash culture, cash management must involve everyone, from management to operational staff. Otherwise, it will be difficult to achieve profitability and overall balance.
However, maintaining healthy finances also benefits (no pun intended) employees. While they play a role in securing cash flow, they can also see a direct benefit in the results.
Not to mention that preserving cash also means safeguarding their jobs in the long term.
The challenge of a cash culture
Even if the CFO remains the orchestrator of the cash culture, the main challenge facing him or her is to succeed in embedding this mindset in employees, to ensure that they adopt the right behaviours on a day-to-day basis to balance or even increase cash.
It's a question of decompartmentalising the challenges associated with cash, beyond the finance function alone:
- sales staff manage customer risk and prevent non-payment ;
- The purchasing department negotiates longer payment terms with suppliers in order to reduce working capital requirements;
- accounting analyses identify the items and actions that create the most value;
- production implements processes to improve productivity, thereby reducing collection times, etc.
☝️Au Beyond awareness, cash culture also defines a methodology, involving the implementation of concrete actions to manage cash effectively. Let's take a look at the main ones.
How do you establish a cash culture in your company?
Communicate sufficiently with employees
For every employee to feel involved, the CFO needs to communicate sufficiently about the results, or quite simply about the very importance of a cash culture.
Your first task is therefore to raise awareness of these issues among the Business Directors and point them in the right direction. If necessary, you will need to train certain employees in the concept of cash management and the associated good practices, with the aim of jointly finding the levers for improvement that can be activated according to the constraints of each individual business.
☝️ This necessary communication also involves setting up rituals for sharing reports, fed by the right indicators, so that employees can easily monitor the state of finances: cash levels, outstanding receivables, etc.
Analyse and secure cash flows
Understanding and acting on the company's cash flows is one of the priorities of a cash culture.
There's no mystery to keeping your working capital requirement negative. You need to take action on :
- collection times. It is important to reduce the organisation's DSO by introducing a solid customer risk management and debt collection process;
- disbursement times, by trying to lengthen them.
One of the best practices is to analyse current cash flows, but also to draw up regular cash flow forecasts, which are essential for anticipating cash inflows and outflows over the coming period.
Prioritise your cash management actions intelligently
There are many things you can do to help manage your cash better. But they can't all be carried out at the same time!
That's why we recommend that you prioritise them, favouring :
- quick wins, operations that are synonymous with rapid gains and that can be deployed quickly within the company. If we take the example of reducing collection times, this might involve introducing a new payment method (online payment rather than by cheque, etc.) or automating customer reminders using software;
- tasks that fall within the remit of the Finance Department, to set an example. How else are you going to convince employees who feel less concerned?
In all cases, your various reflections will need to culminate in an action plan, which will be accompanied by KPIs designed to track your progress so that you can review your strategy if necessary.
💡 Some companies decide to call in a cash manager. If it's not possible for you to hire this type of profile, there's still the option of using an external service provider.
Reduce unnecessary expenditure
When we look at how to optimise cash flow, we often focus first and foremost on cash management.
However, we suggest that you adopt a more frugal mindset at the same time, i.e. make sure that less money is going out the door.
Of course, you don't want to jeopardise the smooth running of your business or the well-being of your employees. But you'd be surprised at the amount of unnecessary expenditure in some companies:
- subscriptions to services that are no longer used ;
- business travel that could be avoided in favour of videoconferencing;
- energy wastage, etc.
💡Reducing costs also means taking another look at suppliers. In other words, try to lower your purchasing costs by renegotiating your contracts or playing the competition off against each other.
What solutions are there to help you deploy a cash culture?
To make your cash culture approach more effective, we recommend that you equip yourself with suitable software. These have the advantage of
- automate many processes (and that makes it easier to integrate the cash culture into your teams' routines) ;
- giving you an overview of your cash flows.
👉 So me examples of tools:
- Collection software, designed to streamline procedures for managing unpaid debts. This is what Cash & Credit, a debt collection and credit management solution, offers in particular. With it, you can automate your invoice reminders using personalised scenarios, and take preventive and corrective action to reduce late payments. Cash & Credit also enables you to effectively manage customer risk, so that you can anticipate problems of non-payment before they arise.
- Invoice dematerialisation software is renowned for saving companies time and money when it comes to transmitting documents. As a result, they get paid faster, especially if the tool includes an online payment function.
- Cash management software. These are used to optimise cash flow monitoring and forecasting, giving greater visibility of the company's available cash and future needs.
Cash culture: in a nutshell!
Faced with the ever-increasing challenges posed by cash management, a cash culture is the right response for ALL businesses. By giving all employees a sense of responsibility, it allows them to influence a number of levers, with the aim of putting their finances on a sounder footing.
But a cash culture is also, and above all, the deployment of concrete actions to increase available liquidity, to react promptly in the event of problems... and also to invest in the future of the organisation!
If you too would like to adopt a cash culture, you can rely on software that will help you to anticipate, take the right decisions quickly, and thus maintain your profitability over the long term.