In this installment of our “Business Intel” series — helping you monitor, understand and maximize your organization’s liquidity and cash management processes — we focus on strategies to make your organization’s working capital work for you and ways to optimize your cash management.
As we discussed in our first post in this series, now more than ever is the time to have a system in place to help monitor and understand your organization’s financial fingerprint.
Over the past few weeks our newsfeeds have been consumed by the immediate health and financial impacts of the COVID-19 virus. As details regarding the potential long-term impact of this global pandemic continue to evolve, strategic-minded companies are beginning to shift their focus from short-term cost effective and combative strategies, to long-term cost reduction efforts. Now is the time for your organization to grasp the opportunity to become more forward-thinking and proactively combat difficult financial conditions.
>> Read the first post in our series, “Business Intel: Why Liquidity Ratios and Cash Conversion Cycles Matter”
To properly brace for difficult, ongoing financial conditions your organization must rigorously manage its working capital and cash flow in the short-term to lead to long-term financial health. By considering the following six cost containment methods, your organization will be equipped to successfully navigate tumultuous economic conditions.
Strategy 1: Transparency, Collaboration and Knowledge Sharing
For most organizations, efforts to reduce costs begin with increasing visibility into how much you spend. Those that shift analysis efforts from simply tracking enterprise spending to ¬gaining insights through cash outflows are much more prepared to make difficult business decisions. You can gain insight through real-time budget tracking and analysis by using dashboards. Identifying the right benchmarks and KPIs can be effective tools in managing working capital to cover current operations.
Promoting transparency and awareness in budget creation, budget performance and current spending is also critical, and often overlooked. Encouraging functional and departmental leaders to communicate and share their critical metrics and KPIs leads to a culture of fiscal responsibility and helps your organization make better real-time decisions.
Strategy 2: Spending Governance and Policies
Once effective communication and financial transparency have been introduced, you can improve your cost-cutting efforts by enhancing internal spending controls through governance and well defined processes. Creating governance around spending related policies can emphasize an enterprise wide focus on eliminating discretionary spend. Within business intelligence tools, your organization can review real-time logs of enterprise wide purchasing activity, for example. Further, analytics can help you pinpoint ineffective cost spending over time by department.
Strategy 3: Vendor Consolidation
For most organizations, vendor optimization can be achieved through consolidation. By leveraging buying power, you can achieve more favorable rates with key vendors, thus lowering spending in cost categories such as freight. Through basic procedures, such as site-walks, to more in-depth procedures, such as data mining, your organization can determine more optimal strategies regarding key vendors and negotiated rates. You can visualize these detailed insights on vendor spend in a PowerBI dashboard.
Strategy 4: Integrating Technologies
Meaningful spend analysis is hard to achieve through traditional business technologies. You can augment spend tracking systems with applications like PowerBI, drilling into data at a granular level with just a few clicks. Building such capabilities will allow you to enhance your ability to manage and monitor spend by accessing data in real time.
Strategy 5: Identify Your Key Activities
Returning to the most fundamental analysis of cost drivers can be extremely effective in a time of financial uncertainty. Revising some of the key costing assumptions based on current economic conditions as well as considering the economic forecast may help your organization.
Even the most sophisticated costing methods need to use somewhat arbitrary indirect costing allocations. By focusing on the key activities that consume the most time for your organization, your management team will be able to identify what is most heavily driving your indirect costs, thus leading to better informed cost allocation decisions. Once your key activities are identified, your organization will also obtain insights that can help drive strategic decision making. For instance, you may find that too much time is being spent to drive production on low margin products. This piece of information during a cash restricted period may help you drive your production toward high margin products or redirect efforts to activities that more directly impact top-line revenues.
Strategy 6: Cash Conversion
Referring back to last week’s blog, your cash conversion cycle equates to the time it takes to convert your resources into cash flows. Thus, the shorter the cycle, the shorter the window for reinvesting that cash back into the business. Focusing on tactical measures to condense your cash conversion cycle is an effective method to increase cash flows during cash constrained periods.
As cash reserves tighten across the board, your customers may be unwilling or unable to make their outstanding payments faster. That being said, consider incentivizing on-time payments by offering current discounts or future credits. If customers view paying early as unachievable, or perhaps unreasonable, this is only one piece of the cash conversion cycle and there are many alternative tactics to increase your cash conversion.
Although the disruption to business this pandemic has caused over the past month cannot be erased, we can begin to better prepare for the future by lessening its impact. By considering a mix of these six cost containment strategies in the short-term, your organization will be better equipped to combat the potential financial strain of the future.
Contact John Cavalier at email@example.com, Mary Washburn at firstname.lastname@example.org or a member of your service team to discuss this topic further.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.