We all know why cash is so important, and we have modern business tools, modules and software to have an effective cash management. Without cash nothing moves.

In spite of knowing that cash is critical for success, how many businesses and the various teams actually do everything to ensure a good cash management process? This article will explore how companies can improve this process and accumulate cash. 

What Is the Difference Between Cash and Profits?

You may have a business which is profitable and still facing liquidity issues or vice versa. I have seen even finance professionals making a judgmental error in these two terms - Cash and Profits. These terms create utter confusion and havoc with many including the group ownership and other stakeholders.

Cash inflow is converting your debtors, stocks into cash and other inflows with bank financing, other lendings, and equity contribution against corresponding cash outflow of payables/ creditors, bank commitments, capital expenditure, overheads payments, and others.  I call these various inflows and outflows as “Drivers’’. 

Profit is what you have to get after selling your stock/ product / services and after what you have committed as an expense to get the above sales. When your cash inflows exceed cash outflows, you get cash surplus demonstrating a sign of effective working capital optimization. 

This article explores the topic of cash management. We will not be discussing how you can make your businesses profitable but will focus on how you can create a cash surplus, optimize your working capital and understand how you can ensure that “cash is king’’.

What is the landscape in accumulating cash in diversified businesses?

Is accumulating cash surplus different for different business models and industries? Yes, it is. There are four factors that need to be taken into account to accumulate cash in a diversified business:

1. Understanding of your business, its operations and its key drivers (“drivers” as used earlier);
2. Key actions for these drivers;
3. Strategies for collecting money from your debtors;
4. Influencing skills with internal stakeholders and external stakeholders.

Let us discuss these factors in more details.

Understanding of the business and actions for its drivers

The understanding of how business operates is a necessity if you want to accumulate cash. The drivers vary depending upon the business. For example, there are different drivers in a construction company vs trading business.

Scenario 1: A real estate developer incurs expenses to complete its projects. There is going to be significant outflow towards payments to contractors and sub-contractors. The unitholders of the buildings under construction may pay some advance payment and some other payments too based on milestone completion. However, most cash inflows come when the building is completed. Therefore, drivers of cash outflow outweigh those drivers of cash inflows. How do you manage these gaps?

A right business case to banks/ lenders can help in getting project finance with sufficient equity contribution. Having a reasonable understanding of your outflows can help you in structuring payments terms with the unitholders to have adequate inflows. This cannot be one-off exercise as you need to revisit the profitability of the projects, cost overrun and take remedial actions. Collecting money from the unitholders requires an aggressive follow up, proactive approach and continuous engagement with unitholders. 

Scenario 2: The drivers will change if you are a distributor whose scope of work involves only supply of goods. Essentially, this is a trading business. Since most of the goods are of standard nature, it is easier to assess the working capital gap and have an effective working capital optimization.  In trading businesses, you are in a position to accumulate cash if you can manage and optimize your working capital cycle and ensure that your business remains profitable.

The above two scenarios demonstrate that drivers for cash inflow and cash outflow need to be tackled differently. You cannot paint every driver with the same brush. 

Strategies for collecting money from your debtors

Communication strategies:

1) Following up
2) Asking for balance confirmation
3) Not doing anything and just waiting
4) Deciding on the status of the client - do you need them, do they need you, or what is the status of the relationship
5) Approaching local partner

Negotiation strategies:

6) Accepting Letter of credit mechanism
7) Accepting Letter of credit mechanism with LC discounting
8) Having cheque discounting / LC discounting facilities with your banks
9) Engaging in a barter system, i.e. you accept other items / services from clients instead of accepting money from your clients 
10) Giving rebate/ discount
11) Not giving rebate/ discount
12) Accepting Post Dated Cheques (PDC)
13) Not accepting PDC but monthly transfers
14) Going to court
15) Going to the chamber of commerce

Alternative strategies:

16) Stopping the work / supplies in between to recover your dues
17) Entering in a new order to get your previous dues
18) Introducing effective internal management - regular collection meetings, assigning champions, having all legal documents in place from the beginning

It can be one option or combination of options. Since any debt can go bad anytime, it is important to work out an action plan and keep monitoring the progress. 

Influencing skills with the internal and external stakeholders

This is the most critical aspect if you have to differentiate yourself from others in working out strategies and actions/ road map to accumulate cash.

Many of the above-mentioned collection strategies suggest that you deal with every debtor differently. What works for A, may or may not work for B.  Similarly, when you deal with your suppliers, it is imperative to think from the supplier’s perspective too. If you are able to negotiate payment terms or offer different modes of supply chain finance solutions, this helps both the suppliers and yourself.

You need to be open-minded when engaging with external stakeholders and try to understand their perspective.

How to deal with internal stakeholders?

In one of my earlier articles, I have explained at length how to successfully deal with internal stakeholders. Here I would like to summarize the insights from this article:

1. Need for out of box solutions: There is a consistent need to provide solutions to the demands, wish list of the family ownership.  Some of these demands, wish list   may be absolutely “No, no’’ to strategize and to execute, some of them only family ownership can imagine, some are very intelligent, some are pure risk ventures. As a CFO, providing out of box solutions is a prerequisite for you to do justice to your job.
2. Managing families and ownership: This is the most challenging aspect when you work for family groups. Every family member can have different vision, different aspirations. Your ability to influence the stakeholders is fully tested. If you are willing to put across your points   with logic, facts and figures, it is possible to convince the family members. This process, can be lengthy and require patience, passion and persuasive skills

In addition, there has to be an efficient mechanism to deal with other internal stakeholders (your peer group and other colleagues).

When dealing with external stakeholders like banks, debtors, suppliers, it is imperative to understand their perspective and offer solutions to them which can be a win-win situation for everyone. It is good to have knowledge of how they operate and of their functions.  This gives ability to negotiate and deal with them.

“Cash is king”: why is this important?

“Cash is king” is not a textbook concept. This is a practical way of doing business. In one of our internal meetings, I spent a full session on the importance of this notion. This approach may need some mindset change.  Everyone in the company needs to understand that 

• every dollar saved is every dollar earned and every dollar earned is every dollar multiplied;
• cost efficient strategies help accumulate cash. Strategic cost control can be difficult but can be achieved with mindset change and with will power. You can refer my earlier article on strategic cost control to  get a full and complete perspective this topic. 

“Cash is King’’ is neither a jargon nor a motivation slogan. It is a situation when you and your team understand the importance of actions and cash surplus.

Let us SOLEMNLY reiterate:

Every Dollar saved is Every Dollar earned. Every Dollar earned is Every Dollar Multiplied.

I will be happy to have your comments, actions, and strategies to reach the above objective.

CASH IS KING.