Cash is king
Why CASH is ALWAYS KING
Most companies are predominantly focused on Ebitda and less on cash. To some extent I understand this focus, as it starts with sales orders in order to achieve a profitable business.
At the same time, it is cash that counts. Suppliers, employees, investors are all paid in cash. Essential for businesses is to align the sales activities and costs with a most optimal cash generating process.
A relatively easy way to create this alignment is to include the customer’s payment behaviour in the incentive schemes of sales colleagues. This enables an improved trade off between the realised margin on the deal and the involved cost of capital that relates to the agreed payment term with the customer.
Additionally, a more proactive approach by the (senior) management teams in respect to non or late paying customers could result in an improved relationship with the customer. If, as part of this proactive approach, the collection process is seen as a ‘qualitative customer feedback opportunity’ instead of just an administrative process, complaints or suggestions the customer may have will automatically be taken more seriously. As a consequence, a proper solution for the customer’s problem is executed faster. This will positively impact the customer loyalty rates as well as the customer’s future payment behaviour.
In respect to suppliers it is important to agree on and stick to clear payment terms. ‘Last-minute payment optimizations’ should be avoided as reliable and predictable payment behaviour is essential for the business continuity of most suppliers and it will also not help to improve the cash flow in a structural way.
Moreover, I think it is important to realise that suppliers are also (potential) customers. Additionally, a supplier will most likely include a (hidden) risk surcharge in it’s future contracts or invoices to compensate for the unpredictable payment behaviour; which will result in an extra and avoidable cash out..
To conclude, I strongly recommend to have a permanent focus on cash by all colleagues. This improves your customer loyalty rates as well as it will enable you to close the best business deals with your suppliers. Furthermore, a predictable cash position will help creating the optimal financing structure for your company, resulting in structural lower interest payments, impacting the cash flow positively, and so on, and so on, and so on.