What I Learned About Cash

What I Learned About Cash

By Nicolas Boucher, Head of Finance & Controlling MIS Germany at Thales Deutschland

Cash is King but do you know your King?

In this article, I will explain to you what I learned about Cash this year and what you can use to improve your cash management. Like most of the Finance Managers, I bring a specific focus on reaching our targets and report on how well (or bad) we do in comparison with these targets.

Most of the financial KPIs are P&L oriented. Therefore Balance Sheet items like Inventory, Receivables and Payables are not the first priority… but play a significant role in the evolution of your cash balance!

This year I learned how to monitor a cash balance, how to plan the cash flows and which action plan can you implement to obtain results.

How to monitor your cash balance?

You need to understand your cash flow. From a theory point of view, you have two methods: the direct and the indirect methods

The direct method uses actual cash inflows and outflows from the company's operations (think about looking about your bank statement).

The indirect method requires more accounting knowledge as it starts from the net income and involves different adjustments from P&L non-cash items and balance sheet movement with cash items.

As a financial manager, you need to understand and be comfortable with both methods. Most probably the indirect method will be used for reporting as this is the one that has more consistency and can be mapped with the other types of reporting (P&L and Balance Sheet). Here is a link to help you improve your understanding of the indirect method for the cash flow statement.

Understanding the impact of the different components of your cash flow statement should be your priority to monitor your cash balance and as a finance manager, it should also be your responsibility.

How to plan your cash flows?

In theory, it is easy: plan your cash in and your cash out. In reality, this is more complex.

For your cash in, you need to use your revenue forecast combined with the payment conditions in place with your clients. If you are in an industry where there are advance and milestone payments not related to revenue, this brings another layer of complexity but can not be forgotten. I recommend using the 80/20 rule and focusing on the main projects/clients to get a quick estimation of your cash in.

Planning your Cash out can be easier thanks to the recurring costs having a monthly frequency with short payment terms (personal costs, utilities, recurring raw material). For non-recurring expenses, you need to focus on the biggest item and use the information from your procurement team to plan when a purchase order will be fulfilled and with which payment terms.

Finally, you need to be aware of exceptional events like Financing or Investing which have significant impacts on your cash balance. Considering your role as a finance manager, you should already be involved in these transactions or at least the significant ones.

Which action plan can you implement to improve your cash?

  • Communicate, explain, repeat
  • Put it at the top of the management agenda
  • Breakdown the action plans specific to each department:
  • Sales: improve payment terms with clients (negotiate down payments and short payment terms), accelerate the closing of deals
  • Procurement: avoid down payment and push the payment terms as far as possible
  • Project: compute and monitor the cash balance of each project
  • Collection of overdues: automate the dunning process and escalate significant issues to management and key accounts/project managers
  • Inventory: monitor level of inventory against forecasted sales, reduce lead time, optimise stock buffer, reduce delays
  • Finance: automate reporting, improve understanding of cash flow statements, bring transparency to management and key business partners, escalate collection issues, use factoring to accelerate cash payment from receivables
  • Management: translate cash objectives in team and individual objectives, put cash in the management reviews agenda, follow up cash as KPI, delay investments, optimise the process between a cash milestone achievement and the issuance of the debit note to your client

Note: my contribution is written in a personal capacity.

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