Almost every company, particularly those undergoing rapid growth, experience cash flow problems. Dr. David Cliff reflects on this common phenomena in organisations.
They say ‘cash is king’ for a reason. Ultimately, every decision made in an organisation is a financial one. Every action a company takes, even stopping for coffee, has financial implications in terms of profit, accessing opportunity, productivity and profitability. Judgements inevitably must be formed around these things in a series of “soft and hard” decisions made on dynamic basis as organisations move forwards.
In my coaching experience, a key challenge around cash flow is that leaders fail to spend enough time with financial data. Accountancy support is something placed “over there”, for the accountant to flag up warnings at meaningful times whilst MDs and others focus on activity, encouraging signs of new partnerships and possibilities and drive the activity of the company forward. The balance sheet is the ultimate barometer of company health, and it is amazing how many people will view that indicator retrospectively than from a dynamic, forward-thinking basis. This is not about micromanagement and knowing the price of everything and the value of nothing. Rather, it is about making informed judgements about the direction of travel the organisation taking fiscally. That duty cannot be delegated, deferred or side stepped in anyway by those in a leadership position.
A key issue with cash flow involves our approach to risk. Entrepreneurs assume risk is an integral part of having a business and to a certain extent it is, however, these things are always “calculated risks”, not capricious ones, nor ones that just “go with the territory”. We talk about individuals having low or high appetites for risk, but it is the quality of the calculation and the reflection around risk that is a key part of honing their leadership persona. Some of the myths, legends, anecdotes and other pieces of entrepreneurial lore, can often get in the way of people undertaking the deep reflection, careful research and forward planning that is needed to manage the fund flows that go in and out of an organisation.
Scaling companies will often fall into the trap of appointing an FD who then becomes, the arbiter of wisdom in terms of financial matters within the organisation and is somehow subconsciously seen as the person completely responsible for the money. The FD on any board is a functionary, part of a collective, but it remains every director to understand the financial implications of what they are doing and to maintain a culture of shared accountability.
It goes back to people “owning” the company in its entirety, a mindset that’s not about delegation or selective accountability for things people don’t want to do. It is about leader’s skilling up with a mindset that keeps them responsible constantly for all aspects of the organisation’s health. Good boards know this, others frequently just blame people.
Finally, cash flows are about Corporate and Social Responsibility within the organisation. Way too often companies resolve their own cash flow challenges by displacing these into their supply or customer chain in the form of late payments and unrealistic terms and conditions.
Big companies will often specify 90 days payment terms with suppliers (increasingly this is morphing into 180 days), something that can cripple small companies, especially if the payment processing cycle has to start over again if there’s just one administration error. Great for big systems handling money with the financial might of larger organisations, but disastrous for the cash flow of small ones. I have heard of dubious practices wherein large organisations offering to speed up payment if a percentage reduction is agreed – effectively a discount to get paid! Understanding contracts thoroughly and long-term financial profiling are essential in such environments.
Early/late payments, define one’s fiscal relationship with the companies and customers around us. They colour partnerships that constitutes business relationships and power between organisations. Neglecting the cash flow through the ‘whole chain’, can create an “us and them” environment where internal mismanagement of our own organisation can stress out other organisations.
At Gedanken, when I work with leaders and company owners, I keep in mind what I started this article with: whilst not being singularly preoccupied with money, we can equally never forget it, as every decision is ultimately, a financial one.
www.gedanken.co.uk