When the COVID-19 crisis hit home, the preliminary response of CEOs and CFOs was all about survival. The liquidity crisis triggered by the sharp disruption in economic activities prompted organisations to rush towards the preservation of cash and liquidity to keep operations going. This is understandable and also the right thing to do.

However, one silver lining to the crisis is that it revealed the critical importance of cash excellence—a set of best practices that enable prudent cash and liquidity management. In extraordinary times, extra cash can prevent a company from going bankrupt. Now, several months into the crisis, executives have a rare window of opportunity to build the current focus on cash into a long-term cash culture.

This means that business leaders need to focus on strengthening the cash culture across their organisations, changing underlying systems and mindsets and implementing no-regrets moves to embed cash excellence into ongoing operations. CFOs can use today’s short-term crisis in cash preservation as an opportunity to focus on sustainable cash management, supported by a strong cash culture from top to bottom. Amid the pandemic, business leaders have shifted (or lets say should have shifted) their focus from earnings before interest and taxes (EBIT) to cash.

A cash culture means support for end-to-end with regards cash management, which involves thousands of daily decisions made by individual employees at all levels: from CFOs managing the books to warehouse managers ordering spare parts to an accounts clerk making payments to suppliers. A cash-focused culture across three dimensions—people, structure and processes—is an important prerequisite for achieving excellence in cash management

People: A strong cash culture starts at the top. CEOs and CFOs need to set the tone by making cash a top priority. Companies that manage cash well regularly communicate to employees the importance of cash not only in the context of enabling resilience during a downturn but also in value creation—for example, by providing capital for investment in future growth. To make this happen, business leaders need to signal to the rest of the organisation that capital efficiency metrics (for example, cash conversion cycle) are as important as metrics related to pure profit and loss (P&L).A strong top-down message should be paired with any needed training to fill any skill gaps to ensure that employees understand the importance of cash and that they have the tools and knowledge they need to make decisions based on both P&L and cash implications. The utterly wrong mindset I constantly face across various business, but even more so across various family businesses, is the belief that cash management is the sole responsibility of the CFO or the finance/accounts department and not of the whole business. The building of a strong cash culture overcomes this misconception and ensures that various areas of the business and the finance team share ownership of cash performance. For example, accounts receivable should be a shared responsibility between finance and sales, not managed by finance alone.

Structure: Cash should be a regular agenda item in meetings of top management and finance leadership, with clear shared responsibilities. Business leaders need to determine a structure to discourage behaviours that focus only on improving quarterly or year-end figures.Clear responsibilities should be set at the appropriate levels. Decision rights should be assigned to employees at the lowest possible level, with an effective escalation structure up to the CFO for matters with significant implications on cash. An owner or champions should be clearly assigned to each process and empowered to improve cash performance. For this to happen companies need to define organisation-wide cash key performance indicators (KPIs), give the chosen champions clear targets and ensure that these are monitored by the CFO. Indeed, assigning the right KPIs to the right level is critical. For example, return on invested capital (ROIC), working capital as a percentage of sales and the cash conversion cycle can be set as KPIs at the top level, while operational KPIs such as percentage of overdues and early and late payments are appropriate for the front line. A clear and practical policy framework should be set in advance to guide frontline workers on daily decisions. To further harbour the point, performance management should ensure the ownership of cash targets by all relevant teams through aligned incentives. For example, sales incentives should be linked not only to sales targets but also to accounts receivable.

Processes: The pandemic demonstrated that a clear focus on cash excellence as part of ongoing operations prepares companies to be more resilient during a crisis and stronger and more competitive when emerging from it. Companies that managed cash prudently before the pandemic have remained resilient, while less-prepared companies faced existential threats in the face of a liquidity crunch. So my message for CFOs is that now is the time to use this “golden opportunity” to more from cash-preservation measures focused on the short term to deeply entrenched structural changes that will make sure that processes are supporting a much needed cash culture.

I will try to give pointers on structural improvements in the area of working capital to support the achievement of excellence in cash management.

Many companies are facing significant challenges in trying to manage working capital in these difficult times—customers and suppliers all faced unprecedented disruptions, highlighting the importance of rigorous process management through the entire cash-conversion cycle. The additional financial stress brought on by COVID-19 has exposed the limitations of traditional approaches to accounts receivable. The pandemic has exacerbated issues with overdues and bad debt. Chasing late payers has overburdened finance teams, especially those still relying on manual processes. Companies with strong cash management before the pandemic entered the crisis in a good position, enabling them to solidify customer relationships by granting longer payment terms for customers with cash-flow problems. Organisations that lacked rigorous payment-term before the crisis could not afford to do so, potentially losing certain customers.Organisations can focus on certain areas to improve the cash flow from their accounts receivable.First, successful companies establish robust customer-credit rating systems and clear policies on maximum credit exposure, maximum payment terms and pricing. These systems and policies are accessible to sales and finance teams,and can help companies guide all new and existing customers through a proper onboarding process. Second, successful companies focus on preventing future overdues as well as resolving current overdues. Many companies direct most of their efforts to fixing existing overdues without addressing the underlying issues that cause overdues to occur repeatedly.

Working capital is obviously also effected by the accounts payable. The pandemic’s sudden shocks have forced companies to take a more strategic posture on accounts payable to conserve cash while maintaining relationships with suppliers. Just as on the accounts-receivable side, companies with more cash could solidify supplier relationships by paying them earlier and alleviating their cash-flow problems, while companies with poor cash flow struggled even to pay suppliers on time. Accounts teams have been overburdened with supplier complaints related to timely payments.In the context of the recent cash-flow crunch, any move to extend payment terms should be made thoughtfully and in collaboration with suppliers. Companies should recalibrate their inventory management strategy to optimise spending while ensuring resilience in their supply chain.Hence companies with levers and best practices to address the challenges
Companies that seek to increase visibility into their supply chain and emphasize collaboration across the supply chain can gain much-needed flexibility. The COVID-19 crisis has demonstrated that forging collaborative partnerships with suppliers is a better long-term strategy for ensuring success across the ecosystem than taking a zero-sum-game approach. Many companies made immediate payments to smaller suppliers to relieve their cash-flow problems, for instance. This new level of collaboration opens the door to better partnerships that will build resilience for the ecosystem in the long term.

Like in every strategy implementation or change management project, timing is essential in resetting an organisation’s approach to cash management. During the COVID-19 crisis, companies have an opportunity to build momentum toward cash excellence based on a strong cash culture. Organisations that seize this opportunity will be more competitive, while those that let the moment pass will find themselves on the sidelines again when the next crisis hits. By building a cash culture, improving underlying systems and embedding cash excellence into ongoing operations, organisations can strengthen their competitive positions now.

At EMCS, we specialise in bridging both the need for a solid financial analysis and the churning of key KPIs, plus setting up a detailed overview and implementation plan to build a strong cash culture in your organisation. Feel free to contact me on silvan.mifsud@emcs.com.mt, to have a chat.