We all know the following, no doubt about it, but somehow many companies fail to execute this #cash management strategy properly. Here are some key guidelines to follow if you wish to make a difference to your P&L:
1) Idle cash should be invested. The opportunity cost of capital is to be considered. Many systems exist to pool cash daily such as zero-balancing. Ask your bank for the options.
2) Hedge your foreign currency positions. At a minimum try to cover those positions that are on your balance sheet. You can hedge against the current rate obviously month-by-month but more valuable will be if you can identify clear streams of foreign currency exposures (e.g. a payroll in a foreign currency), this you can hedge at e.g. the budget rate and avoid fluctuations during the year. Forecasting future transactions is usually subject to more regulation (FAS133 for US GAAP) and goes with a bucket full of requirements such as effectiveness testing. IF you have the resources and the systems this may be worth exploring.
3) Plan your capital investments carefully. Investments usually dig a hole in your cash planning and needs to be done carefully with your #finance/treasury department to avoid having to attract money from the market as your assets are tied up in e.g. deposits.
4) #working capital management. Optimize your terms and conditions such that your customers are paying you earlier than you have to pay your suppliers and limit the amount of inventory held. Your inventory is financed not by the bank or your own cash but by your suppliers. Obviously everybody in your industry is trying to do this, so it is important you are better (simple isn’t it)! Put extra focus on having agreements in place for T’s & C’s and enforce them by having your credit team be on your customers like a hawk. Do not allow your sales force to negotiate on terms as these are the hardest thing to change later on. Regarding inventory, parts that are sitting on your shelf are equivalent to wasted interest you could have been earning.
5) Discounts. Take discounts from suppliers… why? 9 out of 10 times it is favorable to you. Multiply the discount given times the normal term of the invoice minus the discount period. This will give you the discount rate for that transaction, multiply by the amount of times you can do such a transaction a year and you get to the effective interest rate. Almost always is it good to take discounts. How about giving discounts… that is usually costly. On top your customers, how friendly they may be over lunch, they will take your discount and still pay late.
6) Fiscal responsibility. Everybody in your organization uses cash and has an influence on how it is spend. Make it clear to your organization that they are accountable for their budgets and they should spend the cash as if it were their own…
Each bullet had books written about them so do not assume you will manage them overnight. Key is to have clear organization goals for cash management, starting from the top, trickled all the way down into the organization. If you do not have one already, my advise would be hire a cash manager focused on driving behavior, finding opportunities and driving projects in the area of cash management.
Feel free to leave a comment or a viewpoint.