Financial Discipline is a Fierce Competitive Edge

It is no exaggeration to say that growth and middle-market companies live and die by their cash. During the past recession and preceding financial crisis, the cash that formed the lifeblood of these businesses nearly stopped flowing. The 2008 global financial crisis, which slowed commerce dramatically and placed severe constraints on credit, forced many growth and middle-market companies to manage through more serious and more frequent liquidity crises than ever before. This experience motivated many companies to make lasting changes in the way they approach the financing of their businesses including increased attention to the fundamentals of funding their companies and ensuring financial soundness and stability. As a result of the financial hardships experienced during the economic downturn, leading companies have become more financially disciplined as they are more likely to maintain a lean cost structure, a strong balance sheet, and optimal levels of cash and liquidity than prior to the economic crisis and recession that followed.

Financial discipline isn’t just about being prepared to weather a financial crisis. It’s about securing the financial flexibility and control that are essential to gaining a competitive edge. Finance leaders at growth and middle market firms recognize that maintaining a high degree of financial discipline carries risks—in particular, the risk of underinvestment at a key juncture in a financial recovery. Competitive advantage flows from financial discipline as attention to finance fundamentals enables companies to extract cash from their operations and put it to work in their businesses. In an environment of scarce resources, tight credit, and costly financing, cash has become even more critical to a company’s growth plans. For many companies, retained earnings have become the primary source of growth capital over the past four years.

Managing the company’s cash position well is a key discipline in a culture of a competitive financial edge. For many CFOs cash management has become a daily task of managing, monitoring, watching, and staying on top of available cash. Companies only have a certain amount of borrowing capacity and when this funding source gets tight the result is a real strain on liquidity. Cash and working capital management is built into the culture of companies with a competitive financial edge. Managing the finance fundamentals of free cash flow and access to liquidity well could make the difference between merely enduring a gradual and uncertain recovery—and exploiting all the opportunities it has to offer.

Diligent CFOs focus on a continuous improvement of their company’s days-working-capital (DWC) position. Making a better effort at collections serves as a primary contributor to overall improvement in this metric. DWC improvements result from improvements in three primary metrics – (1) days sales outstanding (DSO), (2) days inventory outstanding (DIO) and (3) days payable outstanding (DPO).  Disciplined and focused CFOs understand that improvements in these metrics require collaboration and contributions from their colleagues in sales, procurement, and production. This discipline requires working hard to extract payments from increasingly distressed customers, negotiating more favorable terms with suppliers, and reducing inventory levels while maintaining overall margins.

For most companies, strengthened customer, vendor and banking relationships and better financial reporting are usually key components to better cash flow and working capital management.  CFOs should view building solid relationships with their counterparts at customers and vendors and also with their bankers as a core part of their cash management disciplines.  This requires getting to know the customer’s AP clerk, the AP manager and the AP supervisor as well as other contacts across the organization. If there are troubles in collecting receivables on a timely basis, the company can quickly approach the right people.

Securing reasonably priced, reliable sources of short-term financing is another important aspect of working capital and cash flow management. For most companies, commercial bank lending is still the preferred short-term financing method. Many companies that weathered the economic difficulties of the past four years may, in fact, attribute their survival in part to a strong banking relationship. CFOs can take affirmative steps to increase the likelihood that a company’s banking relationship remains productive. The basic courtesies that help companies maintain any important relationship with an external partner go a long way such as communication, loyalty, discipline, and integrity. Keeping your bank informed and up to date communicates that there exists a real partnership. When things get tough, you want to have a banker who’s going to work with you and stick with you. Longevity is important. Being open and honest is very important. Over delivering against commitments makes a big difference and helps to build credibility and increases likelihood that when things aren’t going as well, your banker will work with you.

The best strategy for cash generation is increasing profitability. CFOs need to be active in the efforts to increase revenues, gross margins and net operating income. As such, CFOs need to be continuously focused on operating cost and expense management and cut out costs that do not truly produce value for the company.

Harvest CFO Consulting can provide your company a highly-skilled CFO who will help your company to create a financial discipline and structure that becomes a competitive edge.


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