Insider Business Club: optimising cash flow

Is there a formula to forecast and optimise cash flow?

Peter Simons, technical specialist, CIMA

There are different levels at which people tackle this. First people start
talking about cash forecasting which is looking at your current position, what
you have in debts in the pipeline, what inventory you have to be sold and who
you need to pay. But you are just managing the information to hand.

The next stage is where people try to accelerate cash flow, which is a more
detailed analysis. Who are the people that are going to pay them? Will they pay?
They look at credit worthiness and focus on people who are more profitable
customers and are the ones who are more likely to convert to cash. They do more
detailed inventory analysis and make sure they only stop lines that sell and get
more careful about the purchasing policy.

What we are looking at are financial measures that tend to be outcomes. The
challenge for us is to provide more high-value analysis and get into scenario
planning ­ looking at things like quality of product, quality of promotion and
those intangible things that convert leads to sales.

How do you combine long-term planning with short-term liquidity

Alison Morgans, senior consultant, Oracle

If we are looking at liquidity management, particularly restrictions on
funding options for companies at the moment, the ability to actually forecast
and be accurate based on the current state of affairs is something people are
now really looking for.

In terms of credibility and your ability to argue your case for extended
funding or for renegotiating funding options as you need, the more information
you can present to your would-be bankers, the better the situation.

It is a combination of both the current state of affairs but also the impact
that has on your strategic planning as a business ­ in terms of where you will
be in two, three, four, five years from now.

Nevertheless, I still encounter very good name companies who are really
struggling to generate timely information. Part of that is their system base ­
they are still using Excel sheets. They have not invested or have not really
thought about the implications.

How do you combine carrots and sticks to get colleagues to focus on

Neil Morling, group finance director, EC Harris

We originally started with, shall we say, the ‘positive stroke’ ­ a daily
email saying ‘this is our cash balance, this is our facility, you can see what
head room there is, what the direction of travel is on the cash’. We are now
using the stick approach as well.

We set up things such as cash and credit committees, where we all sit down
with senior members of the board and review outstanding debts. We ask the
question: does it need someone like the chairman or the chief executive to get

That has had a very good effect within the business, because it is one place
they don’t want to be. So we have used the carrot and now we are using the

I joined the construction industry from the automotive industry. I remember
the US automotive industry two years ago saying it had got at least enough cash
on the balance sheet to last for two years.

Here we are two years later and they’ve, in front of the House of
Representatives, been seeking funding. We always have to take a view on the
longevity of the challenge that faces us.

Have boards switched their attention from earnings to cash

Eric Anstee, senior adviser, Alvarez & Marsal

We have been trying to say for the last 18 months that liquidity risk
management should be on all board agendas. And by that we are saying it should
be embedded in existing risk procedures, they should
be stress tested.

Most importantly, people don’t have what I call an ‘emergency cash release
area’. So that when you do get into the stress situation you can look at where
you can release cash ­ capex being postponed or extending creditor terms. And
there are asset issues that you can deal with and you may be able to unlock cash
there. There is a whole range of issues where companies don’t ask: what the
procedures are in case of emergency?

Now, of course, with the credit crisis, we are seeing a lot of those
emergencies coming out. Increasingly companies are finding that they have bad
debts. SMEs I have been talking to recently are all suffering bad debt
experiences. If you look on the bigger side, on corporate bond spreads, they are
indicating the market is expecting something like a 30% collapse in corporate
bonds. That is built into the pricing of the bonds.

This tells you something about how likely future bad debt issues are going to
be. When a bad debt hits, its obviously not just about the hit on the bottom
line, it is about how are we going to make that cash up.

That is the bit that a lot of people don’t have in their locker ­ the
emergency tool kit. It is just like getting a puncture in the car, you have to
get out and work out how you are going to replace that hole in the cash.

Chaired by Damian Wild

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