Managing cash flow

Managing cash flow

Have CFOs increased their appetite for risk and adopted a sense of optimism since the GFC? After a couple of years in the economic doldrums the CFO, like all business leaders, is looking outward once again and preparing for growth. Some may still fear the threat of a double-dip recession but most company boards and leadership teams are putting the word out: let’s get in on the growth: let’s steal market share from overleveraged competitors. Let’s also launch new products and services and make these high priority for the year ahead.

One item that has remained top of mind is cash flow and its management.

CFOs say cash flow management was and remains their top concern. The GFC has highlighted not changed its importance. CFOs are managing their cash to avoid more borrowings and, where possible, are renegotiating credit terms. As the cost of accessing even short-term capital has increased significantly, many businesses are managing their cash to avoid more borrowings and, where possible, are renegotiating credit terms. This places the CFO front and centre of more aggressive and less conciliatory positions in regard to credit and debit control as well as inventory management.

An event such as the GFC has resulted in greater organizational focus on preserving cash and emphasizing profitable sales. As every CFO knows, effective cash flow management rests upon the fundamental task of forecasting with accuracy when cash will be received and when cash must be paid out. In this regard the climate while not as uncertain as 12 months ago, remains nevertheless fraught. One quip doing the CFO rounds says “expect the unexpected”.

Despite lighter provisioning for bad and doubtful debts by the banks, the small to medium business sector, are, across a number of industries, displaying above trend business failures. This is evident in Australia in the construction sector and some sectors of tourism. Overseas, high end retailers in the USA remain under liquidity pressures.

One response from CFOs in regard to the management of cash flow, is the need for prudent examination of credit terms and a forensic examination of outstandings. Each industry will have its cash and sales cycles and a more robust examination by the CFO in their cash flow management would see them seeking out gaps which can liberate cash. This would impact on both supplier terms and debtor terms.

Further, in a climate of growing confidence and economic activity, rising interest rates almost certainly follow. The CFO’s approach to the management of cash flow must be to lock in credit lines to ensure that short term spikes do no coincide with high prevailing interest rates. In this regard CFO will revisit financing structures that are inefficient and weak. As always, capital spending programs that have not been reviewed and revised to reflect current conditions will present themselves to the CFO for scrutiny.

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Tags risk managementcash flowdebtcost of capitalpreserving cash

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