Good cash management means maintaining sufficient reserves, minimizing idle resources, investing in future expansion and reducing borrowing and processing costs. Additionally, introducing automated controls can provide greater transparency while shortening the cash conversion cycle (i.e., the time your business takes to turn upfront expenses into revenue streams).
The first step in implementing a successful cash flow management strategy is to set clear and achievable goals. Goals should include readily analyzed metrics, such as changes in the length of the cash conversion cycle and the average interest rate paid for cash reserves. It’s also essential to pinpoint areas of friction in your current cash management process. Ask some basic questions:
Once you’ve identified your current areas of weakness, utilize this six-step plan to help you create specific benchmarks for improved cash flow management.
Changes in cash flow management can have surprisingly far-reaching effects, especially for companies with autonomous subsidiaries or overseas operations. For example, a subtle change in automated controls may wreak havoc for a subsidiary that has grown used to extending credit to its major clients. Similarly, increased automation may streamline payment processing for one division, but another may find that the change removes necessary human oversight from important decisions.
The key to avoiding the unexpected is to define the scope of action and tailor solutions to the needs of all stakeholders. Knowing the scope of your project is a vital step in making a realistic assessment of its ultimate impact.
Effective cash management depends on precise timing, and the implementation of any changes should be scheduled in advance to avoid costly disruptions. Even minor changes to processes and controls can send ripples through the entire cash conversion cycle, especially when margins are already stretched thin.
Implementation should be timed to place as little stress as possible on cash reserves. Determining the optimal timing for the project’s rollout will depend on knowing which payables are the most flexible, which receivables are the most reliable and when reserves are at their peak. Timing the rollout to occur at the most resilient point in your company’s cash conversion cycle can limit the potential for disruption and enable a wider range of action.
Consider the implementation time frame—a gradual rollout that occurs in multiple phases may enable greater flexibility and lower the chance of cascading disruptions. Any problems that arise are more likely to occur in isolation and can then be more easily resolved before they can affect regular business.
A phased rollout can present its own challenges, however. The elements of the new system must be compatible with the vestiges of old processes. Sometimes, a half-implemented strategy can actually worsen the system’s current shortcomings—for example, a temporary duplication of controls could create confusion and introduce a bottleneck into a previously straightforward process. Before implementing a staged rollout, it’s important to check for potential conflicts created by the phased transition.
It’s tempting to view cash flow management as a wholly internal issue, but the changes may impact outside partners and clients. Identifying conflicts prior to implementation can help to ensure that you have ample time to negotiate with third parties.
Some conflicts may be predictable—for example, if your business needs to shorten the time frame for outstanding receivables, you may need to ask clients to pay their invoices promptly. Other issues can be difficult to spot ahead of time; for example, minor process changes can cause major glitches in third-party enterprise resource planning software, requiring help from an outside IT contractor.
When preparing for implementation, all potentially affected third parties should be consulted to determine where difficulties may arise.
Thorough planning can minimize any implementation problems or delays, but a fully developed contingency plan can help you head off any problems before they escalate into a crisis. A good contingency plan anticipates how minor delays can create far-reaching ripples and disrupt regular operations.
For example, A hiccup in the implementation of a newly automated payment processing control might lead to a temporary shortfall in cash on hand. If this minor problem suddenly escalates, it could compel a major decision: Should inventory purchases be delayed? Could funds be diverted from an investment vehicle? Will an overnight loan need to be arranged to help bridge the gap?
An effective contingency plan can help your staff to weigh these options ahead of time, enabling a swift decision that curtails potential disruption. Every implementation will likely present challenges, but planning for the risks in advance can help you contain the damage.
The smooth implementation of new cash management practices requires close cooperation among departments (not to mention coordination with numerous outside partners)—IT, legal, compliance and HR will likely all have important roles to play.
Designating a single point of contact to lead the implementation can help prevent conflicts and miscommunication. It’s best if the project leader has comprehensive knowledge of the cash management strategy. Often, the best person for the job can be found within the treasurer’s department, as he or she may be the most deeply involved with the process.
Implementing changes to cash management can be daunting—business as usual cannot be placed on hold as processes are revamped, and problems must be resolved before a minor hiccup escalates into a major crisis. Successful implementation requires extensive planning, effective coordination and clear communication. But the opportunities it can provide your business may prove to be worth the effort.
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