Changing the cash management mindset: embracing new KPIs, tools and strategies

Authored by Heidrick & Struggles and McKinsey & Company : Giulia Iuticone , Cristina Catania , Al Marshall , Enrico Muti , Davide Grande .

As a co-pilot to the CEO, the CFO must anticipate future financial scenarios, help the business set expectations, and navigate uncertain economic times. In the current landscape of fluctuating interest rates, prioritizing cash optimization has resurged to the forefront of CFO priorities. This strategic focus aims to bolster shareholder returns and enhance overall resilience. Finance leaders are looking to improve cash release potential to insulate their businesses from financial stress.

At a recent breakfast meeting in Milan, Heidrick & Struggles and McKinsey & Company invited leading CFOs from across various industries to discuss the need for enhancing cash management, identifying typical cash pain points, and outlining new initiatives. The group examined how CFOs can effectively embrace cash management transformation by changing internal mindsets, redefining KPIs, and employing AI-powered tools.

Meeting the Challenges of Cash Flow Management

The assembled CFOs agreed that the ability to reduce working capital is appealing in a higher interest rate environment, as it offers in-house, low-cost financing. They also identified additional benefits of freeing up cash reserves, including increasing enterprise value, improving credit ratings, and retaining financing flexibility when access to external capital becomes restricted due to macro-economic trends.

For these reasons, an overwhelming 57% of attendees named improving cash governance, including treasury management, as their main motivation when looking to upgrade cash management processes. However, several challenges hinder this intent. A primary obstacle is that internal cultures, and therefore incentive schemes, often prioritize profitability over good cash management.

The same is true for other stakeholders, from shareholders to employees. As one contributor pointed out, Italian investors generally focus more on short-term profitability compared to other European nations. Meanwhile, a CFO described how their company’s product engineers are more concerned with EBITDA than operating cash flows.

The discussion expanded to include how risk management teams aren’t considering cash in their calculations, and a lack of high-quality real-time data and poor communication between finance and operations departments can undermine timely decision-making. One attendee emphasized that the role of treasurer is often seen as passive and mechanical, highlighting a lack of appreciation among the operations team for the dynamic nature of good cash management.

Tools to Transform Cash Management

The assembled CFOs agreed that the corporate approach to cash needs to change, with a new mindset being central to achieving this in the long term. Operating models, business structures, and people are key factors in building a cash culture. However, many find their companies lagging in thinking and governance around cash.

In response to this, some have pushed to introduce cash flow as a KPI on incentive plans. Another described how, since Covid, they have had to act as hands-on project managers to execute projects on time and on cost, examining basic elements of contracts and anticipating when invoices will be paid.

To enable this approach, innovators in cash management are leveraging digitization and AI to upgrade cash, empowering CFOs to create a more cash-conscious mindset, including:

• Advanced cash forecasting: digitizing the cash planning process, embedding AI tools to provide statistically robust predictions of monthly cash inflows, outflows, and balances, including what-if analysis and simulations.
• Digital payment processing: using algorithms to ensure timely payment, avoid duplicate invoices, and capture potential deals through analysis of supplier contracts.
• Machine learning credit scoring: ranking clients on their payment history by using internal and public data to allow for proactive credit management.
• AI-enabled credit collection: targeting defaulted clients with personalized messaging to increase recovery rates.
• Parameter-guided inventory targets: minimizing stockpiling and avoiding bottlenecks by using real-time data on market supply and demand.

Time to Launch a Cash Management Transformation

The use of AI to manage cash flows is arguably still in its infancy, with half the CFOs present never having employed AI for their company’s cash management, while the other half had only reached the stage of sharing ideas on the topic.

With such tools becoming more widely available, now is the time for businesses to develop a structured and strategic approach to transforming their cash management mindset and initiatives, making functional excellence in this field a top management priority. The next step for many will be running AI cash management pilots and developing specific adoption and governance plans. As our attendees agreed, the potential value of effective cash management makes a persuasive argument for adding AI tools in the near term.