1 Copyright 2009 REL, All rights reserved. Blueprint for a Cash Culture

Transcription

1 1 Copyright 2009 REL, All rights reserved. Blueprint for a Cash Culture

2 Executive summary In 2008, the world plunged into an unprecedented financial crisis. Many CFOs suddenly faced the challenge of their career. In even the healthiest sectors, cash began to dwindle. Cash on hand between 2007 and 2008 fell at least 10% in all but two sectors. Total cash on hand, including short-term borrowings, fell 16% to 14.7% for PCs and peripherals, and from 2.6% to 1.9% for multi-utilities. As credit markets froze and sales plunged, cash, the lifeblood of every business, became a precious commodity. Not surprisingly, most CFOs emerged from the crisis with a renewed respect for the importance of good cash flow management. Senior financial executives at the 2008 Hackett CFO Summit suggested that CFOs have increased their focus on cash flow and launched a number of initiatives to preserve corporate cash through such measures as improving their management of accounts receivable, accounts payable, spend management or inventory management. Nearly three in five attending the summit (59%) rated better cash management as their top priority, more than any other cash-saving move, including freezing discretionary spending, delaying or scaling back investment and capital, freezing hiring, or renegotiating supplier agreements. A CFO Magazine study published in April 2009, CFOs rated working capital management and balance-sheet weakness as two of their five top concerns. With memories of frozen credit markets still fresh, many CFOs are working hard to tighten lax cash-management habits to create a cash culture a set of ingrained practices of efficient and effective cash management that saves the company money during the good times but prepares it to survive the worst. But overcoming cash-management habits, some of which may be decades old, is not easy. Neither is seeking behavioral modification not just in finance but throughout the company, including sales and operations. To help CFOs in their quest to build a cash culture, REL Consultancy, the leading global cash-management consultancy, asked companies all over the world to share details of their cash-management practices. In particular, the survey found that: Companies with cash-management steering committees tend to have better results in their cash flow improvement initiatives than companies that lack steering committees. Odds of success improve dramatically with executive sponsorship. Companies that apply a corporate cost of capital have lower ratios of working capital to sales. The more tools and methods companies use to keep their cash flow on target, the more successful they are. Companies that offer incentives to executives and employees to keep a tight rein on their working capital needs tend to have lower ratios of working capital to sales. 2 REL Cash Culture Study

3 Implications for business The bold headlines may be gone, but most companies surveyed remain deeply concerned about their cash practices. The survey found that nearly all (94%) respondents consider cash flow optimization to be important or very important. Nor are executives just paying lip service to the idea. Most respondents said they have multiple initiatives underway to improve at least one of the four most important cash-management areas: accounts receivable, accounts payable, spend management and inventory optimization. Of those with a cash-management initiative underway, 51% have initiatives in all four cash areas, 32% in three of the four areas, 14% in two of the four areas, and just 3% have initiatives in only one area. Clearly, companies have the right goals in mind. However, not all of the companies that have undertaken one or more cash-management initiatives are equally happy with how they have performed so far. The survey results suggest that the dissatisfied companies have neglected a number of simple steps that could make their work much more effective. For the sake of convenience, we have grouped these items within the five categories of change that every company that intends to build a strong cash culture must consider: Organizational alignment and collaboration Executive leadership and sponsorship Measurement and accountability Incentives and compensation Action planning and execution How important is cash flow optimization to your organization? Neutral Number of areas in which respondents have initiatives underway to improve cash management 51% 6% 21% 32% 73% 14% 3% Important Very important 1 of the 4 areas 2 of the 4 areas 3 of the 4 areas All 4 of the areas 3 REL Cash Culture Study

4 Organizational alignment and collaboration When it comes to creating an efficient cash culture, the survey results suggest that a steering committee is an important component. More than 50% of companies surveyed reported having a steering committee in place as part of their working capital governance structure: 57% in accounts receivable cash flow initiatives; 53% in accounts payable; 52% in spend management; and 64% in inventory optimization. But there is more evidence that cash-management steering committees perform an important role than the fact that many companies have them. Survey data suggests that steering committees actually perform a crucial role. Companies surveyed that have a steering committee in place describe their cash-management initiatives as either effective or very effective. Thirty percent of companies that lack a steering committee for their cashmanagement initiatives said they were neutral or dissatisfied with their cash-management initiatives, but only 9% of companies with steering committees reported neutral or negative results. Despite their evident advantages, steering committees are more present in some areas than in others. For example, only 53% of companies engaging in payables initiatives use steering teams to manage the initiatives, even though 64% of inventory initiatives are managed by steering teams. This may be a reflection of executives belief that inventory initiatives in general require a greater level of cross-functional collaboration. However, this is a mistaken assumption, as receivables and payables initiatives have just as many critical stakeholders. Does your working capital governance structure involve a steering/project management committee? Overall, how effective are these initiatives with regard to improving cash flow? 78% 57% 53% 52% 64% 64% 43% Accounts receivable 47% Accounts payable 48% Spend management STEERING COMMITTEE IN PLACE NO STEERING COMMITTEE IN PLACE 36% Inventory optimization 13% 6% Very effective Effective 9% 24% Neutral STEERING COMMITTEE IN PLACE NO STEERING COMMITTEE IN PLACE 6% 0% Ineffective 4 REL Cash Culture Study

5 Executive leadership and sponsorship As the steering committee finding might suggest, another important factor in forging a cash culture is the degree of executive leadership brought to bear. Of those companies where the C-suite took an active interest, 88% rated their cashmanagement programs either effective or very effective in terms of cash flow improvement. In companies where the C-suite took no role, the success rate falls to 55%. In other words, companies where the C-suite provided some sponsorship experienced neutral or negative results in their cash management only 12% of the time. Where there is active involvement that is, where someone from the C-suite serves as a program leader, steering committee member, or as a setter of target or goal development results also tend to be strong. Eighty-eight percent of those where the CFO is actively involved were effective or very effective in improving cash flow. Among those where CFO involvement was confined to general support or where there was minimal involvement, the rate of failure or ineffectiveness grew to 26% and 25% respectively. Is the C-suite involved in these initiatives? Overall, how effective are these initiatives? 77% Effectiveness of cash-culture initiatives based on level of involvement by C-suite 88% 74% 75% 55% 45% 26% 25% 11% 12% 12% 0% Very effective Effective Neutral or ineffective Active involvement Support No/minimal involvement C-SUITE INVOLVED C-SUITE NOT INVOLVED VERY EFFECTIVE/EFFECTIVE INEFFECTIVE/NEUTRAL 5 REL Cash Culture Study

6 Measurement and accountability Peter Drucker and other management thinkers have said, You cannot manage what you do not measure. Cash management does not appear to be an exception. Often, companies lose opportunities to handle their cash more efficiently because they do not have the right systems in place to track their internal and external cash flows with sufficient granularity to manage it. The findings of the survey support this observation in two ways. First, companies that used more working capital tools had demonstrably better cash management. Asked whether they used working capital metrics and scorecards, cash target setting, or employee compensation employed by the CFO to reinforce cash allocations, companies that used four or more tools have a lower working capital-to-sales ratio. Second, one tool in particular, a corporate-wide cost of capital, proved a good way to achieve a lower ratio of working capital-to-sales. Although only 32% of companies surveyed used a weighted average cost of capital (WACC), those that make investments according to WACC achieved a much lower ratio of working capital to sales. Of the third that applied a corporate cost of capital, 73% achieved a working capital to sales ratio of less than 15% compared with only 46% among those that did not apply a corporate cost of capital. In the end, both findings also serve to illustrate the fact that when it comes to creating cash efficiency, there is no quick fix. A CFO looking to help his company achieve excellence in cash management cannot rely on a single tool. Instead, he needs to set up a system a culture that will look after its cash. Do you apply a corporate cost of capital to the P&L of the respective businesses based on their balance sheet requirements? Corporate cost of borrowing applied What is your organization s working capital percentage sales? 32% 73% 46% 68% 54% 27% No corporate cost of capital applied Corporate cost of capital applied No corporate cost of capital applied WORKING CAPITAL SALES >15% WORKING CAPITAL SALES <15% 6 REL Cash Culture Study

7 Incentives and compensation Companies that use employee incentives to encourage better use of capital appear to be investing their money wisely. A total of 66% of companies surveyed include cash and working capital targets in employee compensation plans. Of those companies that have cash and working capital targets, 58% have working capital needs of less than 15% compared to 48% of those companies that do not include incentives to encourage incentives for cash and working capital targets. Where cash and working capital are included in employee compensation, the level of contribution and application varies by function and seniority. Ninety-five percent of senior managers and C-suite executives have working capital targets. Eighty-five percent of companies that include cash and working capital targets in employee compensation apply the targets to the compensation of employees within finance. However, such incentives are only applied to sales employee compensation in 50% of cases. Within the C-suite, cash results are given a high level of importance: 56% of C-suite executives have more than 26% of their compensation dependent on meeting cash flow targets including 23% for whom 50-75% of their pay depends on meeting targets. Do you include cash and working capital targets in employee compensation? And what is your organizations working capital percentage of sales? 58% 42% 42% 58% Targets included in compensation Targets not included in compensation WORLD-CLASS SALES >15% WORLD-CLASS SALES <15% Percentage of employees with cash and working capital targets in their compensation plans Percentage of cash flow targets that contribute to employee compensation for each function 95% 85% 75% 23% 10% 20% 10% 25% 10% 20% 5% 15% 60% 50% 32% 55% 40% 30% 30% C-Suite/ Senior management Finance Operations Sourcing 40% 40% 50% 25% 15% 5% Sales C-Suite/ Senior management Finance Operations Sourcing Sales 0% UP TO 25% 26%-50% 51%-75% 7 REL Cash Culture Study

8 Applying the findings The study results suggest that working capital practices would not improve without a concerted effort. Instead, companies that succeed in improving their working capital do so thanks to the pursuit of a strategic plan, typically one that incorporates multiple tools and focuses on all four key facets of working capital: accounts receivable, accounts payable, spend management and inventory optimization. Other survey findings point to a truth that is often overlooked by companies as they take steps to improve their cash management: the importance of any plan s energetic execution. In fact, as each of these steps suggests, the commitment of the C-suite to convert the company to a cash-driven culture seems to be at least as important as the particular steps taken. A future that once seemed bright and certain can suddenly depend on the actions of a few crucial moments. No matter how strong the brand, how reliable the customers, or how good the product, a prolonged cash crisis can dash all that potential. In certain extreme situations, the absence of good cash management can make all the company s other assets nearly worthless. Even now, as the fear begins to recede, most companies are looking to protect themselves from as much cash risk as possible. But how? Shrinking sales and margins make generating cash flow from operations is tough. The most logical step is to focus on the processes that generate cash flow. Unfortunately, not all companies know how to do it. This survey suggests that some important measures can greatly improve the likelihood of their cash flow initiatives success. 8 REL Cash Culture Study

9 Survey Methodology The study was conducted from June 9 until July 13, Fifty-three companies responded to the survey. Most respondents were in the Global 1000 and have an average of $24 billion in revenue. Although the optimal level of cash retention varies by industry, geography, and corporate risk preference, the results of the survey suggest that company-wide policies of good cash management are consistent regardless of those other characteristics. To receive a complimentary cash flow assessment, call or register your details at and take the first step toward releasing more from cash from your operations today. To download a full copy of REL s 2009 Working Capital Survey and its summary of findings, please register your details at About REL REL, a division of The Hackett Group, Inc. (NASDAQ: HCKT), is a world leading consulting firm dedicated to delivering sustainable cash flow improvement from working capital and across business operations. REL s tailored solutions balance client trade-offs between working capital, operating costs, service performance and risk. REL s expertise has helped clients free up billions of dollars in cash, creating the financial freedom to fund acquisitions, product development, debt reduction and share buy-back programs. In-depth process expertise, analytical rigor and collaborative client relationships enable REL to deliver an exceptional return on investment in a short timeframe. 9 REL Cash Culture Study Copyright 2009 REL, All rights reserved. (TWC002_US_1109)