Many companies are still trying to maximize profit without fully understanding the implications on cashflow.
In manufacturing you might push for utilization to lower unit costs. But if production exceeds demand, you will end up with goods in your inventory tying up cash and likely depreciating before they are sold. Overproducing will only sugar coat your P&L in the short-term by “hiding” some fixed costs in your inventory, while your cashflow continues to suffer.
EBITDA (earnings before interest, tax, depreciation and amortisation) does not equal cash. Ensure you have a seamless cooperation between sales – who are best positioned to forecast demand – and operations in addition to KPIs that mitigate any sub-optimization.
Businesses that measure their customer value using gross profit analysis are often surprised to see that some of their top-tier customers can actually be destroying shareholder value and stressing out their cashflow. How?
The products – utilizing materials with short supplier payment terms coupled with a low inventory turnover – that the customer buys and the customer’s payment term, plus poor payment behaviour, might mean that your capital is tied up for many months before you’ll see that profit.
With potentially limited cash available, are you able to wait for the money you invested in working capital to come back with a margin? In these cash-challenged times, it makes sense to assess the working capital cycles by product and by customer to identify improvement actions and inform how you should prioritize.
Monetize excess stock
Analyse your inventory by stock-keeping unit. Most businesses have some products or items that have not been sold in months, where the hope of a future sale has created a hoarding behavior. There is a good chance they will not be sold in the near-term either, unless specific action is taken.
Review historical data, identify customers who have previously bought the product and launch a targeted campaign to shift the dead weight. Ultimately, the potential cannibalization impact must be assessed, since discounts are likely needed to get the stock moving.
Go after the money
Generally, accounts receivable teams don’t have a relationship with the clients’ decision-makers, rendering emails and calls to the accounts payable departments less effective for the required results. Alternatively, build a taskforce to collect the receivables. Define the process and escalation paths, empower employees and make them accountable for including sales team members who typically have the highest potential to influence the customer, and measure and incentivize them.
Always recognize your employees’ efforts and positive results by communicating them within the organization – employees enhancing cashflow during distressed times are situational heroes and acknowledging that will only serve to strengthen the cash culture in the organization.
Any cost-cutting should, with few exceptions, start at departments furthest away from cash generation. Identify those where reduced revenue has resulted in lighter workloads. Recruitment might be frozen; some development projects might have been eliminated and some frontline staff members may have been let go leading to a low staff/manager ratio. Conduct rigorous analysis to understand the potential to cut and its impact on cashflow. Consider the opportunity of putting employees on furlough when the one-off end-of-service benefits would lead to an unmanageable cash outflow.
Even though these decisions are emotional and difficult to make, they must be addressed quickly to avoid the spread of uncertainty and declining morale across the business.
Improving your business performance through these actions is critical when you are stretched for cash. The improvements, when sustained, will support future profitability and capital efficiency as well.
After prevailing against the immediate financial stresses of liquidity challenges, these measures will also aid the longer-term de-leveraging of the business and enable you to free cash for investment or dividends, ultimately enhancing long-term shareholder value.