A company with poor Cash Flow planning can go bankrupt even when its bottom line is positive 

In times of change, issues that have not been under the radar for a long time tend to come to light. I encountered the first unforgettable challenge when we changed the logistics partner in an international high-tech company I worked for. The second challenge came when the financial industry started adopting IFRS 9. Banks had to book increased accrual for the estimated losses for the overdue accounts receivable. 

The flip side of a challenge is called opportunity. 

Cash Flow analysis, forecast, and performance indicator reporting are a natural part of the work of an FP&A team. But outside the FP&A department, not all in the organisation understand how their activities and decisions affect the free cash flow. We suddenly had remarkable deviations here and there. So we decided to call the managers/specialists representing various functions to identify the root cause and solve the problem together. This opened up new opportunities for us to strengthen our understanding of business processes and Cash Flow mindset and improve organisational culture.

Cash Flow management is a comprehensive art 

Regular reviews of mega processes, guidelines, and best practices help us share knowledge and be more agile. We started looking into the end-to-end value chain and interdepartmental cooperation and identified the bottlenecks for converting our products and services into cash. We also reviewed the internal routine for overdue debt management. We did this work in line with the self-audit of mega processes. Initially, we encountered some resistance, which characterises all kinds of change management. Over time, all of us could realise business decisions and day-to-day work, like sales/purchase agreements that determine payment terms and discounts, logistic processes including inbound/storage/outbound, invoicing and collection of fees, after service) affect our liquidity position. It's vital to communicate any irregularities or deviations as soon as we spot them outside FP&A to spread a sense of urgency in the whole organisation. We need to take one step further to implement an early warning system by doing forecast and scenario analysis and urging the organisation to take corrective actions. 

Performance management. It helps to get the senior management on your side and advise the management to include Cash Flow aspects in regular performance reviews and evaluations. It is an effective way to cascade the Cash Flow mindset in the organisation. Also, it is easier to prioritise the investment to improve Cash Flow, for instance, a system implementation, when the Cash Flow-related question is high up on the management's agenda.

Mindset, culture and cooperation

The account receivable department or FP&A department alone cannot improve the Cash Flow-related issue. In my case, we had regular meetings with the people representing each function in the value chain and reviewed all outstanding items with the financial impact of material size. During the meeting, we identified the reasons for the overdue and agreed on who should do what by when. We continued having meetings to follow up on the actions and shared the progress with everyone involved. After some iterations, all departments outside FP&A started to take a more holistic approach to their work and better understand one another's mandates. As a result, we could significantly improve the situation and the financials. 

Figure 1

Psychological safety at the workplace matters. The managers' sense of shared responsibility, a spirit like "You are not alone. The current situation is challenging. And we together can solve the problem!" creates a sound ground for open communication and more frequent interaction among people at all levels. An organisation with a blaming culture and fear-driven management is toxic for long-term sustainable financial performance. Lastly, FP&A needs to stay curious and make a continuous effort to learn and develop. We will be perceived as trusted financial leaders and business partners by increasing our knowledge of the business, market, and value chain. 

Digitisation. We, FP&A experts, provide a map and direction for a company's journey to reach the goal. It's our responsibility to continuously provide timely and accurate analysis of today's liquidity position and encourage the organisation to take corrective actions to be where we want to be. Enhanced system support can increase accuracy and transparency. It will make the reporting & monitoring process more efficient, too.

Managing Cash Flow is like building a strong tower that won't collapse in times of crisis. Above all, underlying profit is fundamental to sound Cash Flow. Without this, no art of Cash Flow management will make a long and lasting miracle. And improve work processes and business decisions that affect Cash Flow. What you do in day-to-day work can make a difference. Get the senior management on your side and bring a Cash Flow mindset into performance management. Build a culture where people feel safe to escalate the issues and are empowered to take corrective actions. 

Figure 2

Conclusion

Finally, you can top up the tower with financial products like credit insurance, overdraft facilities, leasing & factoring, debt/equity financing, cash pools, and netting. But keep this in mind: if you don't do your homework earlier, you will need to pay a high price for external help later.