Cash flow – The illustrious, sometimes elusive and for some, mythical creature

by Pieter le Roux | February 9, 2021

cash flow

What is the one thing that all businesses need to thrive?… In the early days of civilization, it took on various forms, from cattle and grains to silver and gold.

Cash flow – this illustrious, sometimes elusive and for some, mythical creature is the bread and butter of any business.

The more relevant question is how do we:

  • ensure that our ‘cash flow’ does not become a mythical creature,
  • reducing the impact on our business when it becomes elusive, and
  • maximise our return on the cash invested in our business?

Foremost is the fact that you cannot answer this question without approaching it in the correct manner. This is by firstly gaining an in depth understanding of the business, its strategy, how it applies its strategy in its supply and value chains, its finance function and treasury cycle. When you have this understanding, you gain insights into processes, risks and key drivers of the business that can assist in identifying the key cash flow drivers.

I firmly believe that cash flow can only be perfected when you identify, measure, and react on the key drivers in your cash flow cycle. This should however not be done in isolation… for example if you have an import or export business and you implement a standalone foreign exchange management policy, without considering the impact of this policy on the holistic cash flow cycle of the business… this can have a disastrous impact on your cash flows and may similarly lead to an ineffective foreign exchange management policy.

We see every day that financial managers, CFO’s, Financial Directors, etc. focus most of their time and attention on the income statement and cost savings, while cash flows and cash flow reporting plays second fiddle. When you start to change this around in a business, by focussing your reporting (and yes, also in the boardroom) on the cash flow drivers of the business, suddenly a whole new world of excitement and opportunities presents itself. I believe income statement reporting for decision making purposes is dead and should be replaced by cash flow driver reporting… and yes, these drivers should still be measured against a budget, but even more importantly against a benchmark (sometimes a more long-term goal and other times a market related benchmark).

Once the key cash flow drivers of the business have been identified, what areas need to be focussed on to build a holistic and robust cash flow cycle that not only supports the business, but helps it grow and optimise the return on investment? I list them alphabetically as I believe that each of these areas are of equal importance and require specialist attention and skills:

  • Cash
  • Compliance
  • Financial Management
  • Foreign Exchange Management
  • Performance Management
  • Treasury Management (managing the flow of cash and commodities in the business)

1. Cash

A core aspect of cash is determining the optimal funding structure for the business on an ongoing basis by considering both the equity and debt components of funding.

I regularly find that many businesses do not take the power of rentals (pure rentals, like wauko’s waurentals where somebody else takes care of the maintenance, insurance and admin, while you enjoy the use of the asset) into consideration in optimising their funding structure. I believe that a business should use its funding (equity and debt) to procure the assets that directly earn an income or revenue for the business, while any other asset should be rented. This optimises the funding structure of the business, by increasing the cash available to spend on income generating assets.

The implementation of a cash management policy is of critical importance, especially when it comes to cash flow forecasting and liquidity management.

Two further considerations come to mind when considering cash in a business:

  • the ability to update and predict your cash flows and manage your liquidity in real-time;
  • ensuring that your business has the most suitable banking relationships in place – these should be value adding.

2. Compliance

Being a compliant business is very important when it comes to the cash flow cycle and cash flow management. I have experienced many occasions where businesses had cash flow problems or even went bust because of their compliance not being up to scratch.

Laws and regulations are there for a reason and ignorance is no defence. Business should ensure that they comply with acts like the Companies Act, the Tax Acts, Exchange control rules and regulations, etc.

I have seen many times where businesses and advisors opted for complex structures and schemes to gain an advantage or circumvent laws and regulations… in very few of these situations did the benefit of these structures outweigh the real cost and associated risk measured from a cash flow perspective.

3. Financial Management

We call it V-TAC at wauko… our machine that ensures that our clients do not suffer a heart attack. For data to be useful and to enable the business to manage the cash flow cycle effectively and efficiently, it needs to be:

  • Valid
  • Timeous (available in a timely fashion)
  • Accurate
  • Complete

When your data ascribes to these principles, it not only optimises the cash flow cycle, but it also becomes a very powerful tool in strategic decision making. It is here where real growth is generated in a business.

Risk management is also an important component of financial management. Identifying and understanding risk properly assists in the implementation of mitigation techniques, whether these are in the form of controls, policies and procedures, insurance, etc.

4. Foreign Exchange Risk Management

There is no sense in denying that proper foreign exchange risk management can be a demanding undertaking. In fact, many businesses do not engage in foreign exchange risk management because they perceive it to be too demanding or too complex a task. This creates the perception in some companies that managing this type of risk is not cost-effective, and that foreign exchange losses must simply be written off as the price of doing business abroad. Even when businesses do recognise the need for foreign exchange risk management, they often limit their approach to the occasional use of foreign exchange forward contracts. These contracts may be purchased at a time when a detailed analysis of a business’s foreign exchange exposure and the sensitivity of its cash flows to exchange rate movements have not been performed, hence diminishing the effectiveness of such contracts.

That said, effective foreign exchange risk management is within the reach of all businesses. To successfully mitigate foreign exchange risk, businesses should start by focussing their analysis on their business operations. By operations, I am referring to all the tasks that must be completed throughout the business to procure, manufacture and/or sell a product abroad and make a profit. Understanding the operating cycle in order to formulate a foreign exchange management policy that can be applied on a consistent basis is a key component of managing this cash flow risk:

5. Performance Management

People are the biggest asset and arguably the greatest differentiator in business.

When you can grow the people in your business, your business and the stability of its cash flow cycle will grow with it. I do not believe in traditional performance management initiatives where KPI’s serve as whips and chains. I believe that if you focus on the growth of your people by improving and growing their strengths, they will achieve so much more!

The key to successful performance management is trust and understanding. Employees are more productive and motivated when the work environment is supportive, trustworthy, and respectful. This starts with the core values of the business. When the core values are reflected in the everyday work of leaders and employees, the business is successful and will outperform the industry.

6. Treasury Management

Gone are the days where cash flow management is performed on excel spreadsheets. Effective cash flow management requires proper systems and technology to not only record transactions but ensure that policies and procedures are applied on a consistent basis.

Our own wautreasury solution is an example of a single platform that helps you manage your cash flow and banking requirements, forex and commodity dealing, bank accounts, investment accounts, funding, payments and treasury accounting.

Below is an example of cash flow forecasting and liquidity management made easy:

Identifying the key cash flow drivers of your business and finding the time and skills to focus on the areas identified in this article may seem a daunting task, especially when you are out hunting for an elusive or mythical creature. At wauko we have teams of experts in each area (waucash, waucomply, waufm, waufx, wauperform, wautreasury) that will not only assist you in the research to identify the key cash flow drivers and to determine the best ways of improving your cash flow cycle; but once determined, we will implement and run your cash flow cycle to ensure that you can focus on your core business activities.


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