Improve Performance: Build a Resilient Cash Culture

How to Foster a Cash Culture and Improve Financial Performance

As financial management grows in complexity, building a resilient cash culture is a cornerstone for sustainable growth and operational stability. Recently, a diverse panel of finance experts, including Andrew Lee , Chief Financial Officer at RealWear, Brian Jorgensen , Treasurer at Bose Corporation, Timothée Clément of Agicap and me - Steve Rosvold , Founder at CFO.University - participated in a comprehensive session to discuss effective strategies for fostering a cash culture. Here’s how your organization can leverage our lessons to build a cash culture that will enhance financial performance.

Key Themes:

1. Long-Term Value and Strategic Investments

A strong cash culture is the foundation for sustainable business growth and strategic reinvestment. By ensuring operational cash flows are efficiently managed, companies can convert profits into free cash flow margins, enabling investments in innovation and expansion while maintaining financial stability. This balance drives long-term success.

Maintaining a resilient cash culture ultimately leads to long-term value and allows for strategic reinvestments.

"A strong cash culture converts profit into free cash flow margin, enabling reinvestment and business growth," Brian Jorgensen

Examples:

• Reinvestment Strategies:

With a strong cash culture, companies like Bose have been able to prioritize reinvestments in product development and growth initiatives without compromising their financial stability.

• Alignment Across Teams:

Successful alignment and coordination among executives and operational teams help in recognizing and acting on the value of a cash-oriented approach, leading to sustainable growth.

As your cash culture grows don’t squander your new found cash.? Develop tools to assist you in determining where to invest it. ?Here is an example you can use as a benchmark, the? Capital Investment Analysis and Request Form

2. Daily Cash Visibility and Its Long-Term Benefits

Daily cash visibility offers critical benefits to finance executives, providing them with the necessary insights to make informed decisions swiftly. With real-time access to cash snapshots, finance teams can anticipate and mitigate potential cash flow issues before they escalate. This proactive approach ensures the organization maintains liquidity and avoids financial disruptions.

“Daily cash visibility primarily benefits executives like the finance team, treasurer, CFO, and CEO, while periodic updates (weekly/monthly) suffice for other employees.” Timothée Clément

Examples:

• Snapshot Reporting:

At Bose, cash reporting involves daily snapshots of cash, investments, and past-due records, which help maintain real-time awareness among the senior leadership.

• Systematic Accountability:

At Bose associating past-due records with responsible executives has enforced a higher level of accountability, ultimately improving their Days Sales Outstanding (DSO) by six days.

A dashboard incorporating your highest priority information needs regarding cash is an excellent step in creating a cash culture within your team.??? Use this piece by Olga Rudakova, FCCA to help design a dashboard with cash benchmarks that meet your needs, Why Dashboards are a Powerful Tool in FP&A

3. Integrating Cash Culture in Operational Decisions

Embedding a cash culture involves integrating cash management principles into operational decisions. This includes managing inventory, accounts receivable, and extending credit terms prudently. By doing so, companies can maintain healthier cash flows, avoid liquidity issues, and support sustained growth and innovation.

“Optimizing the balance sheet through disciplined working capital management can provide necessary cash without significant trade-offs.” Andrew Lee

Examples:

• Inventory and Receivables Management:

For RealWear, maintaining discipline in managing inventory and accounts receivable has been crucial. Appropriate credit terms and inventory management practices can mitigate the negative impacts of unsold inventory and unpaid customer credit.

• Use of ERP Systems:

Implementing collection tools within ERP systems and setting up automated payment reminders were some of the low-hanging fruits Lee mentioned that significantly improved their cash management processes.

The cash conversion cycle (CCC) is a key tool for understanding and then improving working capital management.? The Cash Velocity Calculator not only computes your CCC, it highlights how improvements in specific working capital areas will impact your cash needs.??

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4. Building a Cash Culture through Leadership and Education

Leadership plays a critical role in establishing and maintaining a robust cash culture. By prioritizing education and embedding cash management principles throughout the organization, finance leaders can create a cohesive understanding of the importance of cash flow. This collective awareness ensures that all departments are aligned with the overarching financial objectives, promoting better decision-making and enhancing overall financial performance.

“A cash culture isn't about saving money or pinching pennies, but about earning an appropriate return on capital,” Steve Rosvold

Examples:

• Educational Initiatives:

CFOs and finance leaders must educate team members on cash metrics and the financial implications of their actions, fostering a deeper understanding of cash flow impact across business departments.

• Goal Setting and Prioritization:

Brian Jorgensen highlighted setting priorities and leveraging available tools to improve metrics like DPO (Days Payable Outstanding) which involves engaging executives directly in negotiations with suppliers.

An important step in creating a cash culture is to grasp how cash is actually moving through the business.??Don't confuse this with how you think cash is moving through the business.? Preparing a cash forecast and comparing forecasts to actual results is one of the most effective processes leaders can put in place to ‘get their arms around’ cash flow in their business.? If you aren't already using a cash flow forecast tool this article explains the process and includes an example tool,? Why Every Business Should Build Weekly Cash Flow Forecasts

5. Performance Metrics and Incentivization

Aligning and tracking performance metrics related to cash will create a transparent and accountable environment that will improve your cash culture. By setting clear targets around key metrics like Days Payable Outstanding (DPO), Days Sales Outstanding (DSO), and Inventory Days (DIO), organizations can drive improvements in cash flow, engagement in financial goals, and operational efficiency.

"Tracking and setting goals around metrics like DPO, DSO, and Inventory Days (DIO) while aligning management teams to specific targets is essential," Brian Jorgensen.

Examples:

• Performance Reporting:

Bose's daily cash reporting, which includes snapshots of cash, receivables and investments, has not only enhanced visibility but has also improved accountability by linking past-due tracking to responsible executives.

• Improving Cash Conversion Cycles:

Companies have successfully improved their cash conversion cycles by integrating performance metrics into their cash culture, thus enabling faster cash collection and better inventory turnover.? (refer to section 3 and the Cash Velocity Calculator)

When it comes to reporting on cash, establishing Key Performance Indicators (KPIs) is an important step.? Bernie Smith’s Library is an excellent resource to use when establishing your KPIs for cash or other critical parts of your business. ?

6. Tools and Technology for Optimized Cash Management

Effective cash management requires more than just traditional accounting practices; it necessitates the utilization of advanced tools and technology. Factoring programs, supply chain finance, and sophisticated reporting tools like SAP, Power BI, and Snowflake provide the flexibility and comprehensive oversight needed to enhance cash flow management. Such technologies are crucial in maintaining a seamless, fluid cash conversion cycle.

A significant aspect of fostering a cash culture is leveraging appropriate tools and technology.

“For continuous improvement of the cash conversion cycle, there is no ideal time for vendor payments; flexibility and technology are paramount.” Andrew Lee

Examples:

• Factoring Programs and Supply Chain Finance:

Incorporating tools like factoring programs and a supply chain finance program can provide the flexibility needed to optimize the management of cash.

• Reporting Tools:

Bose has utilized SAP for primary operations, supplemented with Power BI and Snowflake for advanced data reporting and repository, which have been pivotal in generating impactful reports for the senior leadership.

The CFO Tech Stack: How To Build Your Modern Software Rack by Raghavendra Reddy (RR) addresses cash management and other finance areas while highlighting what factors CFOs should consider when choosing the tools in their tech stack.

7. Ownership Transition and Its Impact on Cash Management

Ownership transitions can significantly influence how an organization handles cash management. For Bose Corporation, the shift from private ownership under Amar Bose to institutional ownership by MIT demanded new approaches to cash visibility and accountability. This change has driven the company to place a stronger focus on cash conversion metrics and streamline their processes to handle cash inflows and outflows.

"The transition of ownership from Amar Bose to MIT significantly influenced our approach to cash management," Brian Jorgensen.

This ownership change created a renewed focus on cash visibility and accountability.

Examples:

• Visibility for Decision-Makers:

Over the past few years, Bose Corporation has improved the visibility of cash flows for executives responsible for cash conversion, ensuring informed decision-making. ??(refer to section 4 and the 13 Week Cash Forecast)

• Revised Payment Practices:

The company transitioned from paying vendors multiple times a week to a once-a-week schedule (Friday), opting for payment deferrals when in doubt. This change not only tightened control over cash outflows but also simplified the cash-out payment schedule.

David Safeer takes an thoughtful and innovative approach to cash flow management in his article, Cash Flow Management: Being Unconventional ? We think you’ll like it.?

8. Real-World Application and Case Studies

Real-world applications and case studies offer the best evidence of the significance of a cash culture. These examples demonstrate how understanding and optimizing the cash conversion cycle can lead to substantial cash flow improvements, showcasing practical benefits that can be realized by implementing the discussed strategies.

Real-world applications and case studies provide compelling evidence of the significance of cash culture.

Examples:

• Case Study of Oregon Company:

A notable example involved an Oregon-based company that nearly ran aground purchasing more inventory than it could afford to pay for.?? The scare inspired changes that improved cash flow by aligning its operations with a cash-centric mindset. By understanding and optimizing their cash conversion cycle, they made substantial cash flow improvements – and avoided running aground.

• Crisis Management:

Andrew Lee's crisis management experience highlighted the rapid transformation that’s possible through strategic actions in cash management, turning around the company’s financial position through tight inventory management and payment terms.

"Understanding and optimizing the cash conversion cycle can significantly enhance cash flow," Steve Rosvold

To set you cash management foundation take the course,? Introduction to Cash Management .? Cash management may not be rocket science, but it is crucial for a well-functioning business.

Conclusion

Fostering a cash culture is vital for financial resilience and long-term success. By focusing on cash visibility, leveraging the right tools and technology, educating teams, integrating operational decisions, and aligning performance metrics, companies can significantly improve their financial performance. As Steve Rosvold concluded, “A cash culture is not merely about conserving cash but about achieving a high return on capital through disciplined and informed financial management.”

For CFOs and finance leaders, the insights shared by these experts underscore the importance of a strategically developed cash culture that aligns with the broader financial goals of the organization. Implementing these practices can transform cash management from a routine function into a powerful enabler of business growth and stability.

Post Script

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All the Best,

Steve Rosvold

Chief Learning Officer, CFO.University

CFO.University is a convenient, practical and performance enhancing development platform for CFO's, FDs, accounting, finance and treasury leaders.

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