Keep Calm - Cash

Cash Is King:

We all know why cash is so important, and hence we have ever prevailing??business tools, modules, software to have an effective cash management.

My purpose of writing is to??share my business and industry perspective of “Cash” and how this has been the most crucial component always, but more so in this new decade.

You may say that the above is obvious, as??without cash, nothing moves.?True, I agree.?This indeed is the reason for??this article-- In spite of knowing, that cash is critical and therefore “Cash is king”, how many businesses, and the various teams actually do everything??to ensure this obvious gospel.?Hopefully, by the time you finish the article, you will have more clarity and actions to see that you actually do everything to??accumulate cash.?So, enjoy the ride??with me.

Cash and Profits ?

You may have a business which is profitable and still facing liquidity issues or vice versa.?At times, I have seen even finance professionals making a judgmental error in these two terms - Cash and Profits.?These terms create utter confusion, and?havoc?with many ,including?with the?group ownership and other stakeholders.?In simple terms, cash inflow is converting your debtors, stocks into cash and other inflows with bank financing, other lending, and equity contribution against corresponding?cash outflow of payables/ creditors, bank commitments, capital expenditure, overheads payments, and others.??I call these various inflows and outflows as “Drivers’’.

Profit is???what you have??to get, after selling your stock/ product / services and after what you have committed??as an expense??to get the above sales.??When your cash inflows exceed cash outflows, you get cash surplus??demonstrating a sign of effective working capital optimization.

This?discussion is about cash?and not about profits and hence we will not be?discussing?how can you make your businesses?profitable , but on how?you can make your businesses more cash surplus ,?optimize your working capital and?understand how can you ensure?“Cash is king’’.

Diversified Businesses:

Is accumulating cash surplus anything to do with the business model you have? I mean, if you are a real estate developer, or having batching plants for your manufacturing businesses or??distributor for your partners in a trading business or offering consulting services or an entrepreneur for a small size business, do cash accumulation actions and strategies differ??Yes, they do.

What is the landscape in accumulating cash in diversified businesses?

Let us make an attempt to know??what needs to be factored in your businesses to accumulate cash:

1)?Knowledge of your business, and how it operates and how the key drivers (“Drivers” as used earlier), get impacted in your diversified businesses.

2)??Key strategies / actions for these drivers.

3)?Collection?strategies / actions for collecting money from your debtors.

4)?Influencing skills- with internal stakeholders and external stakeholders.

Knowledge of your business, and how it operates and how the key drivers get impacted in your diversified businesses and Key Strategies / Actions for your drivers:

The understanding of how business operates is a necessity if you want to accumulate cash. The Drivers vary depending upon the business.??Let me explain considering two businesses:

When you are a real estate developer in a construction company, responsible for constructing buildings:?You incur first expenses to complete the projects and there is going to be significant outflow towards payments to contractors and sub-contractors.?The Unit holders of the buildings under construction, may pay some advance payment, and?some other payments too ,?based on milestone completion?.?However, a good quantum of cash inflows from the sale comes when the building is completed.?So, you are bound to have situation of drivers of cash outflow outweigh those drivers of cash inflows.?How do you manage these gaps?

A right business??case to banks/ lenders can help in getting project finance,?with sufficient?equity contribution, and also having reasonable understanding of your outflows towards business payments can help you in structuring payments terms with the unit holders to have adequate inflows.?This cannot be one off exercise, as you need to revisit the profitability of the projects, cost over run and take remedial actions. On collecting money from the unit holders, need is to do aggressive follow up, be pro active with the status of the projects and keep continuous engagement with unit holders.???I will be discussing the collection strategies/ actions later in the article.

The Drivers will change if you are a distributor to a Principal??as his trading partner, and the scope of work involves only supply of goods.?Essentially a trading business.?Since most of the goods are of standard nature, it is easier to assess the working capital gap and have an effective working capital optimization.?In trading businesses, you are in position to accumulate cash if you can manage and optimize your working capital cycle and ensure that your business remains in profits.

The above two scenarios from a construction business, and trading business demonstrate??that drivers for cash inflow and cash outflow need to be tackled differently.?You cannot paint every driver with the same brush.

Collections strategies/ actions for collecting money from your debtors in Diversified Business Models:

I am sharing with you a consolidated?list of various practical methods?which can be?considered in collecting?dues in diversified businesses / models???:

1) Accepting Post Dated Cheques (PDC).

2) Going to court.

3) Going to chamber of commerce.

4) Not accepting PDC but monthly transfers.

5) To stop the work / supplies?in between to recover your dues.

6) To enter in a new order to get your previous dues.

7) To simply follow up.

8) To ask for balance confirmation.

9) Not to do anything and just wait.

10)?Deciding the??status of the client-?do you need them, do they need you, or what is the status of the relationship.

11) To accept Letter of credit mechanism,

12) To accept Letter of credit mechanism with LC discounting.

13) To have cheque discounting / LC discounting facilities with your banks.

14) To engage in barter system, i.e. you accept other items / services from clients instead of accepting??money from your clients.

15) When to give rebate/ discount.

16) When not to give rebate/ discount.

17) Effective internal management-?regular collection?meetings, assigning champions, have all legal documents in place?from beginning.

18) To approach local partner.

It can be one option or combination of options?but need is to work out action plan case by case., and keep monitoring the progress.

It is important to consider that any debt can go bad anytime and hence to consider the actions from the beginning and being proactive.

Influencing skills with the internal and external stakeholders:

In my view, this is the most critical aspect if you have to differentiate yourself from others in working out strategies and actions/ road map?to accumulate cash and say Cash is King.

Let us first understand how your dealings with external stakeholders??are important.?When liquidity is a scarce commodity,?and?businesses challenging, then the need is to adopt actions / strategies which are different than others. Many of the strategies which have been suggested above to collect money consider, that you deal with every debtor differently.?What works for A, may or may not work for B.?Similarly, when you deal with your suppliers, it is imperative to think from supplier’s perspective too.?Your ability to negotiate payment terms, offer different modes of supply chain finance solutions including fin tech solutions, reverse factoring, help the suppliers and you too.

The above does need you to engage with external stakeholders, with an open mind, and also be in a position to understand their perspective. Are you willing to do this?

Dealing with internal stakeholders:

In my earlier article - Family Businesses – Challenging, Exciting or Else? (https://www.dhirubhai.net/pulse/family-businesses-uae-challenging-exciting-resilient--ocm1f/?trackingId=Rs5yVx7NQO2PEMXH%2FfC7nA%3D%3D ?)?I have explained at length how dealing with internal stakeholders, though a challenge, can be successfully done.

You can read it at the above link.?I would like to specifically highlight the below, from the article to help dealing with the “Internal Stakeholders”:

1)?Need for out of box solutions:?There is a consistent need to provide??solutions to the demands, wish list of the family ownership.?Some of these demands, wish list??may be absolutely “No, no’’ to strategize and to execute, some of them only family ownership can imagine, some are very intelligent, some are pure risk ventures.??As a CFO, providing out of box solutions is a pre requisite for you to do justice to your job.

2)?????Managing families and ownership:?This is the most challenging aspect when you work for family groups.??Every family member can have different vision, different aspirations.??Your ability to influence the stake holders is fully tested.?If you are willing to put across your points??with logic, facts and figures, it is possible to convince the family members. This process, can be lengthy and require patience, passion and persuasive skills

In addition, there has to be?an efficient?mechanism to?deal?with other internal stakeholders (Your peer group, and other colleagues).?“Cash is king” is not a text book concept, but is a practical way of dealing and doing business.?In one of our internal meetings, I had spent a full session on driving this point?deep?dive to everyone in the group.?This may need some mindset change too.?Everyone needs to understand that?Every Dollar saved is Every Dollar earned and Every Dollar earned is Every dollar multiplied.?And it is equally imperative that everyone understands??that being cost efficient helps, and it adds up to accumulating cash.?Strategic cost control can be difficult, but can be achieved with mindset change, and with will power.?You can refer my earlier article on?strategic cost control?( https://www.fpa-trends.com/node/941 )??to?get a full and complete perspective on achieving strategic cost control, and there by?accumulating cash.

“Cash is King’’ is neither a jargon, nor a term to motivate only.?It is, when you, and your team start believing that??positive, concrete actions are needed??to have Cash and to have businesses that are cash surplus.?This is “Cash is king’’.

Let us?SOLEMNLY reiterate:

Every Dollar saved is Every Dollar earned.?Every Dollar earned is Every Dollar Multiplied.

I will be happy to have your comments, actions, and strategies to reach the above objective.

Keep Calm -CASH IS KING.