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CASH IS KING AND COST IS BOSS
It’s Not About Turnover, it’s about What’s Left Over.

A5. Cash Image

In a perfect world board members, owners and executives shouldn’t have any reason to doubt whether or not they should be able to rely on the numbers. 

The extent of regulation around financial reporting is voluminous and despite it running long into governance it can be adversely impacted and immediately ‘undone’ by short-sighted decision-making. 

By this we mean manipulating the decisions around operating assumptions that affect ‘the numbers in an effort to achieve short-term results. Whilst we hope that this may be the exception rather than the rule it is the accrued revenues, the forecast margins and aspirational cost management that becomes the most destructive. 

It is amazing really, the number of people that capably count revenue yet cannot manage cost and believe that profit equals cashflow? In many organisations this translates into an inability to optimise cash flow when your ability to earn it is compromised. Quite often there is nothing left over. 

Again, this is all about people being your ultimate enablers. And unfortunately, from a financial perspective, the wrong people will be your disablers. 

Rock-Solid Numbers. 

Rock-solid numbers are the tip of the iceberg in relation to an organisation’s vital signs, and the first of the critical interventions that experienced leaders deploy when managing a crisis. 

It should also be top of mind for business as usual. 

Rock solid numbers give you guidance so that if something comes out of left field, you know the critical metrics and you know your options, creating greater agility in your response. 

All too often we hear of business leaders blind-sided by what turns out to be poor information, illogical forecasting and inaccurate reporting leading to profit write-downs depleted cash flows and often, a precarious business proposition.  

Financial perspectives are the ultimate  effect  and people, including our customers, are the ultimate cause. As a leader, forget about blaming the people that you empower and engage with, what are you doing about this? The buck stops with you. 

Consider the following strategies to get on top of the numbers that matter: 

1. Key Metrics. Establish your own dashboard of the fundamental high-level operational KPIs so that you can gauge real-time performance.  

  • Have a sense for daily, weekly or monthly cash-based metrics and productivity outcomes that will enable you to accept, question or dig deeper into management reporting.  
  • It can be as simple as five ‘live’ numbers that are delivered to you so that you can then interpret them for net cash flow, overhead liability, break-even sales, productivity metrics, and contingency fund, to name but a few. They need to be the metrics that represent business sustainability. 
  • The critical difference here is that you interpret the data outside of traditional operational reporting, you ask the questions without absolute reliance on complex colourful spreadsheets, and you therefore gain the truly deep insights that you need in order to be able to reliably make fundamental business decisions. 

2. Sensitivity. Insist on pre-determined, consistently applied cash flow variances and sensitivities.  

  • Not only does this continuously test your operational forecasts, it allows you to plan differently or to have initiatives that provide, say, three scenarios against the top five key risk and opportunity variables. 
  • This is not about generating additional and confusingly concurrent strategies. Rather, a trigger point from which interventions are deployed from your ‘worst case’, ‘likely case’ and ‘best case’ scenarios. 
  • The importance of this is made more relevant due to the volatility, uncertainty, complexity and ambiguity of ‘business as usual’. 
  • As a leader, you will not know everything and that’s okay; however, if you can move up a gear into this level of detail, then you will be successful, and you will gain credibility through delivering predictable and reliable results. 
  • Remember it’s about critical numbers, your options, and your response.  

3. Governance. Beware the reliance on complex, overly detailed and colourful operational reports. 

  • The message here is to ensure that any data delivered to you is relevant, current and based on tangible productivity output rather than aspirational forecasts and accruals, that is, you can measure it and you can sense test it. Constantly test data integrity. 
  • When it comes to crisis management, beware of traffic lightIn fact, in crisis management, amber does not exist. Either it’s high risk or low risk nothing in between which provides a very clear method for prioritising resolution. There is no ‘half a risk’ it’s go or no-go, not maybe.

In amongst our day-to-day operational grind, we need to avoid becoming a post box collating operational numbers. We may not have time to drill into the minute detail and we don’t want to disengage our people through micro-management however we do need to find a way to get to succinct, reliable and relevant reporting. 

Attacking the Cost Base 

Whilst an uncertain economic environment requires the lean approach, we need to ask whether we are cost-cutting to temporarily inflate the bottom line and hoping to improve cash flow… or are we restructuring to regeneratethe business? 

At what point should this intervention be introduced? 

Restructuring is a pre-planned initiative to optimise and maximise current resources to meet the current and anticipated market. Whereas cost-cutting is simply stopping the bleeding… for now. Either are relevant at a specific point in time. 

Either way, how do we know that we are ‘restructuring’ the right areas, in the right sequence, with the right people, for the optimum outcome? 

Attacking the cost base via a systematic, planned assessment of the business’ overheads will be one of the actions of a tactical response plan’s financial objective. 

A successful business is adaptable in terms of systems and processes, and agile in terms of cost structure. Here’s what you need to do. 

1. Fixed Costs. Break down the overhead component and/or specific business unit into accountable expense lines for a detailed assessment. 

  • Too often, we start with an assessment of people – roles, responsibilities and remuneration – which is not always the right answer. You must undertake a quantitative analysis of each resource and the impact that they have in generating, managing and/or supporting revenue-generating activities. 
  • Drill into the fixed costs first – not only does this allow you to assess, for example, outsourcing opportunities, it will also generate some quick wins and show the business that it’s not just people being restructured. Thus, the meaning and purpose of the restructure will gain credibility.

2. Value Add. Identify the synergies, integration and outsourcing opportunities, and remove the duplications. 

  • What are the administrative and/or related tasks that can be managed by external specialists? Well-entrenched, historical systems and process are usually indicative of a business that is reluctant to meet volatility and uncertainty head-on.   
  • Identifying synergies through integrating specific functions common to different business units often provides a quick win and another level of people engagement through diversification of roles and responsibilities. 
  • What part can technology play? New problems are being solved every day through easy to source cloud-based apps and technologies, not to mention the data that generates real-time business analytics, and the benefits of a more people-efficient overhead structure. 

3. Forecasting. Don’t just target costs inside the Profit and Loss – rationalising future liabilities can also create an opportunity to be more agile and receptive to alternate strategies. 

  • Divesting underperforming operations is a no-brainer however beware those that won’t often ask the tough questions around operations that may hold some historical, rather than commercial, benefit. An example of ‘holding on’ to eventually fail. 
  • Whilst bricks and mortar have long been held as a fundamental foundation to any balance sheet, have you assessed the cost benefit in divesting part, or all, of the asset, and then investing the capital in ‘bigger picture’ business growth via outsourcing, partnership or technology? What strategy will create the longer-term benefit? 
  • Attacking your cost base leads to the ultimate goal of any lean business – having engaged an efficient level of capable resources to deliver the optimum return measured by secured market share, sustainable bottom line, and prospects for continued growth. 

Here are 5 Fundamental Cost Management Questions to ask yourself: 

 

  1. Lean and MeanIf I am cost-cutting to stop the bleeding what is my end game? What needs to happen by when, for the bleeding stop? 
  2. End GameAnd to what extent am I restructuring the cost base to sustain our compelling reason for being in business? To what extent will our purpose be impacted?
  3. Capability. How do I know that I am restructuring the right areas, in the right sequence, with the right people, for the optimum outcome?
  4. Vested InterestWhat is my supply chain partnership strategy?
  5. Partnerships. What does my cash buffer look like and how do I access external capital? Is it debt or is it equity? 
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