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Mercredi 7 Septembre 2011

Do You Have A Cash Culture?

The Great Recession of 2008 caused many companies to focus on cash above all else as sales and profits vanished. However, the 2011 CFO.com survey on working capital highlighted that companies are now sitting on record levels of cash. The implication is that finance executives are paying less attention to cash and focusing on other priorities. While some companies would look at the amount of cash on the balance sheet and feel comfortable, establishing a cash culture is more important than ever.

Do You Have A Cash Culture?
Why Is A Cash Culture Important?

Cash is an essential component of financing future growth. Inefficient cash management can result in a higher than necessary cost of capital and a reduction in the ROI to shareholders. Breaking apart the cost of capital and looking specifically at debt, having a strong cash position on the balance sheet can result in more options for debt financing. Risk is the biggest factor when determining a company’s cost of capital and having a strong cash position can significantly lower the risk of borrowing and therefore the cost of borrowing.

Turning from ROI to shareholders, The Association of Financial Professionals found that companies are sitting on large amounts of cash as a result of not knowing their cost of capital. The effect of using a higher than necessary cost of capital in capital budgeting can result in companies not accepting projects for growth that they would have accepted using lower cost of capital measures (i.e. a higher cost of capital will result in higher hurdle rates for capital investment projects). Therefore companies are choosing to sit on cash rather than invest it in capital improvement projects. The obvious effect of not taking on strategic projects for firms seeking growth is a lower ROI to shareholders.

Are You Managing Cash Effectively?

Assessing if you have a cash culture begins with an assessment of how effectively you are managing cash today. While there are plenty of quantitative measures available, including macro measures found in the 2011 CFO.com survey on working capital, a proper assessment should include qualitative measures including questions such as:
- Is the focus of management purely on external financial measures (i.e. those reported analysts) such as sales, profit, and EBITDA?
- Are divisions measured solely on operating profit rather than cash flows?
- Is cash forecasting report produced and reviewed routinely? Is the information timely or dated? Is the information complete and accurate? Are actions from the review documented and tracked?
- Is working capital managed? Similar to cash forecasting, is a working capital report produced and reviewed routinely?
- How is the role of Treasurer defined? Is it narrowly defined such that the Treasurer is only responsible for the relationships with your bankers?
- Are an overwhelming majority of funding sources for your business non-cash? Businesses with plentiful non-cash funding sources tend not to have a cash culture.

What Are The Attributes Of A Good Cash Culture?

After you have assessed your current organization, there are specific attributes of a future state that indicate if cash is part of the corporate culture.
- Your organization should have clear responsibilities for cash performance and delivery at all levels, but in particular for those that manage P&L.
- A good understanding by senior and departmental management of the cash levers within their business and what the current and historical metrics are against those levers.
- Clear cash targets for the business and properly cascaded down to individual departments and individuals
- Timely and regular reporting of cash and working capital performance
- Regular cash forecasting and re-setting of targets
- Good operational and financial controls over cash and visibility of when they are not working
- Cash impact is considered for all key management decisions
- Management incentive schemes include a significant cash and working capital performance element
- Management structures which facilitate cash focus, e.g. cash committee

In summary, managing cash is not simply about a SET of quantitative measures. Effective businesses develop a cash culture as part of their corporate culture. Developing the culture starts at the top. Does this sound like the organization you manage?

2011 CFO.com survey on working capital :

Jonathan Collins is a senior manager for KPMG China in Hong Kong.
Jonathan publishes business and technology insights for CFOs at


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