Industryweek 14496 Cash Management2

The Cash Management Imperative

Dec. 24, 2015
Cash management requires the SME owner or CEO's personal attention; it can't be left to the controller alone.

No small or mid-size enterprise (SME) is going to be rescued by a government program, like the banks are. Banks are so much more involved in politics that they treat taxpayer's money like their best source for cash.

SMEs cannot afford this kind of thinking; they must earn -- and manage -- every cent.

Generally among SMEs, I hear a lot of talk and see a lot of activity addressing the lean management knowledge, leadership skills, management practices and financial prowess that executives need to run a company.

However, I hear too much talk -- but do see not enough action -- when comes to cash management. Indeed, many SMEs I know do not make decisions based on their cash flow; this is a problem.

Ultimately, every business is about generating and investing cash and managing cash flow, day-in and day-out.

Managing cash is a daily chore in an SME, and the CEO or owner must get involved more often than they usually do. The CEO cannot leave this to the controller alone. I've seen too many SME owners all but shut their eyes and cross their fingers when paying out cash. As well, I've seen them hesitate to push when getting cash from customers is a challenge. This can't happen if the SME owner wants to grow the company.

Cash is King; hence the King himself, the CEO, must get involved in its management."

A typical cash management problem in SMEs is that the planning is not conducted in detail. For example, material availability is left for computers to handle, but very few SME owners ask themselves whether the computer has sufficient data to make reliable predictions.

Many SMEs use factoring as a relatively easy way to manage cash. However, even factoring can be a large burden for an SME owner or CEO.

Pay Attention to Cash Management Details

Here are some of the obvious reasons why SMEs find cash management so difficult:

  • Checking every requisition before purchasing is time consuming, and your ERP system does not have up-to-date data.
  • You are not using your inventory planning systems, so availability predictions are unavailable.
  • Sales is granting extended payment periods to customers, and everybody thinks that doing so is necessary to make the sale.
  • Your customer is not paying or is paying way too late, even after the initial payment period was fairly long. (I have seen receivables older than 18 months, and nobody cared.)

Cash flow process improvements have an impact throughout, and even outside, the company. In an optimum cash-flow improvement project, even the suppliers and distributors must get involved and are affected.

To start a cash management improvement project, follow this simple and eye-opening plan:

  • Make a comprehensive, but simple, spreadsheet listing all cash relevant items from now into the future.
    • Do not just estimate your needed purchases; try to add them to the list with as much detail as possible.
  • Plan to have a meeting -- at least weekly -- with your team to discuss the details of this spreadsheet.
  • Challenge them on the following:
    • Payment periods to customers and suppliers
    • Cost of a new customer
    • Cost of poor customers
    • Are they selling what is in inventory or items with long lead times and large minimum-order quantities.
    • Processes

Holding a weekly cash management meeting is more a more effective cash management strategy than just handing your staff an ERP print-out. Once cash flow is improved, an ERP system is a great tool to keep things on track.

In SMEs, cash flow issues seem to be a very much-neglected issue. Who wants to call their customer asking for money! Sales usually thinks the controller must run after cash, and it seems everyone else thinks "we here to spend cash!"

It's up to the SME owner to tackle this critical issue.

Cash is King; hence the King himself, the CEO, must get involved in its management.

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