More than a year after the credit crisis reduced cash on hand at most American companies by an average of 10% and froze many out of the credit markets, establishing a cash management culture remains still a struggle, according to a new study from management consultancy REL, a unit of the Miami-based Hackett Group.
Mark Tennant, president of REL, says that despite the new focus on cash, many companies still aren't integrating the idea of cash optimization into the fundamental workings of their businesses.
The study identifies four key areas for improving cash management: accounts receivable, accounts payable, spend management and inventory optimization. Of the 53 companies surveyed, with average annual revenues of about $24 billion, 97% reported initiatives in at least one of these areas, but only half said they had initiatives in all four. Furthermore, many firms report unsatisfactory results of their efforts–a problem that Tennant attributes to companies' failure to take a “strategic approach” to the issue.
The study found that a key factor in improving cash flow is establishing employee compensation incentives that include targets for cash and working capital. Two-thirds of respondents say that they include such targets in their compensation plans. Of the companies that link pay to cash targets, 58% say they have achieved a working capital ratio of 15% of sales or lower. Only 48% of companies without compensation incentives report such relatively low capital ratios.
Most companies include these incentives at the C-suite level, but Tennant says that for cash management reforms to really be effective, an awareness of the importance of cash optimization needs to be extended to departments like contract management, procurement and sales–all of which, he observes, “are pretty remote from the balance sheet.”
Even providing incentives for cash optimization awareness across a company may not be enough. The study also found that it was important to establish steering committees to manage the initiatives in different business units or departments. Only 9% of companies that have steering committees report being dissatisfied with their results, compared to 30% of companies that do not have such steering committees.
“Most companies have already picked the low-hanging fruit when it comes to cash optimization,” says Tennant. “The challenge going forward is for a company to integrate the idea into the fundamental workings of the system.”
For a look at how one 2009 AHA winner went about educating its workers on the importance of cash flows, read Instilling 'Culture of Cash': DRS Sustainment Systems.
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