Permanently Improving Cash Flow
24 June 2014
Most companies have elaborate procedures for reviewing operational errors. They consistently review their products. When things go wrong they identify the cause of the error and resolve it to avoid similar issues in the future.
However, when it comes to cash flow management, few managers go to the same level searching for the root cause of a cash problem. Too often managers get caught up manipulating cash receipts and expenses for short-term gain.
There are two main approaches for improving cash flow:
- Adjusting the timing of cash flows
- Adjusting the value of cash flows.
Most companies will quickly identify with this approach – asking suppliers to wait a bit longer for payment and asking customers to pay earlier.
However, timing adjustments have one large downside – impermanence.
By adjusting the timing of the cash flow the business is simply delaying the inevitable – eventually those suppliers must be paid!
Although adjusting the value of a cash flow sounds quite simple and delivers superior results, in practice it requires much more thought.
In the case of an expense, to decrease the value of the expense the manager must look beyond the movement of cash to the underlying source – the action or business process which requires this expense.
By understanding how an expense contributes to the business’s value creation process, managers can assess the necessity of the expense and whether the underlying business process could be changed to achieve a similar result at a lower cost.
Example: To decrease the amount of fuel purchased a manager must understand how the Company’s vehicles are being used? Is the current delivery route the fastest? Identifying a faster delivery route or using a more fuel efficient vehicle would permanently decrease the fuel expense.
This analysis of business processes takes time and a deep understanding of how your business creates value, but the cash flow improvements justify the effort. By decreasing a periodic expense, a manager permanently improves cash flow and profitability.
Both timing and value adjustments are useful approaches for managing cash flow. Timing is a great way to manage cash flow in the short-term. However, understanding the underlying business processes, their link to cash flow and making value adjustments will provide a superior result over the long-term.
Sebastian Hyde is a Senior Executive with Vantage Performance; a leading company in sustainable business improvement, winning national recognition in 2008, 2009, 2010, 2011 and 2012.