It is inevitable that Cash will become more important to CFOs and Chief Procurement Officers everywhere. So. I find this Throwback, as timely as when I first wrote it in 2014.
What is Cash Management?
As the Wu-Tang Clan once proclaimed, “Cash Rules Everything Around Me….. Dollar Dollar Bill Y’all”
While I can’t speak to its relevance to the “rap game,” in a business sense, the Wu-Tang statement above is very true. Cash is the lifeblood of any business operation and understanding net cash positions allows executives to sleep at night. Automated expense management solutions let managers see business expenses in near real-time and ahead of period closing, while also helping finance teams invoice customers for reimbursement in an accurate and timely manner.
If you don’t have visibility into cash flow and the strategies that can be used to impact it, it becomes much more difficult to manage. Thus, an effective cash management strategy tracks many metrics that are driven by P2P including:
- Implemented savings
- Payment terms (contracts)
- Early payment discounts captured – Dollar amount or as a percentage of total opportunity
- Percentage of suppliers participating in early payment program
- Days Payable Outstanding
In a nutshell, companies that have their cash management locked down have an accurate picture of their short-term liabilities, get reimbursed by their clients in a timely manner, and track who pays early.
Importance to the Procurement Department
“Got my mind on my money and my money on my mind” so says Snoop Dogg… and most corporate treasurers.
While cash management is the responsibility of the treasury department (or the finance department where an official treasury function does not exist), procurement can have a huge impact on cash. Just consider this list of procurement-led strategies that impact cash positions:
- Demand management
- Payment terms
- Compliance
- Cost reductions or savings
- Managing projects and investments using a TCO analysis
- Supply holding costs
- Process efficiencies
Cash management skills and strategies often extend to the highest ranks in procurement, including Chief Procurement Officers. When the credit markets tightened during the Great Recession, cash management skills and strategies increased in importance to core business operations. In those tough times of 2008 -2010, many procurement executives like Pete Connelly, when he was the CPO, Leggett & Platt and Chris Osen, when he was Vice President of Supply Management, MeadWestVaco helped increase working capital on an order of tens of millions of dollars by moving quickly and aggressively to renegotiate (i.e., extend) supplier payment terms and set new policies. Other leaders, like Luca Guzzabocca, when he was the CPO at Banca Monte Dei Paschi Di Siena in Italy, had cash management as a top organizational priority every year.
The establishment and implementation of advanced cash management strategies can be extremely valuable to the financial stability and well-being of the enterprise; they also provide a great reason for procurement and finance to collaborate. Beyond payment term policies and negotiation, procurement has many other tools in its cash management drawer, including demand management, compliance and post-payment audits, and the more obvious, savings and departmental efficiency. It’s our view that cash management should become a core competency for the procurement function.
Importance to Career Advancement
To paraphrase an old rap lyric – “If you’re not making dollars, you’re not making sense” (Note, I could not in good conscience link to that original rap song due to ‘adult’ lyrics – those that click on the link, still get a musical treat – “Close to You” by the Carpenters, arguably the least rap-like song ever sung. Enjoy!)
This statement is true on the business side but it’s also true on the personal side. Good corporate cash management skills can help you end up with more personal cash to manage. Managing cash in a procurement sense does not actually mean counting dollars ans sense but utilizing the strategies bulleted above to improve cash positions. Cash management goes beyond managing your company’s checkbook. It requires practitioners to have visibility into who owns various business processes, as well as inbound and outbound cash flows, payment dates, and discount rates. Clearly, there are a lot of moving parts and stakeholders involved in cash management; but it’s your chance to demonstrate value.
The reality is that procurement professionals who have a broader skill sets will advance farther and faster so understanding how cash flows through a business and what strategies impact it is a valuable skill. To use a series of baseball analogies (it’s spring, right?), playing ball will help you and your team score big in the ninth and up your chances for post-season play. In the meantime, do yourself a favor and remember the home runs you hit or runners you caught stealing (not literally, I hope) – these success stories will come in handy when your contract’s up for renegotiation, you become a free agent, or you’re released.
The CPO’s Grade
Chief Procurement Officers gave their staffs a D+, well below average when it comes to cash management. Since the successful execution of certain cash management strategies requires a level of cohesion and visibility across the source-to-settle process (aided by technology solutions like Spend Analysis, Contract Management, and P2P systems including eProcurement and ePayables) finance and procurement should work together to identify and then plug any gaps in the current supply management (i.e. procurement and accounts payable) processes and systems. For the average department, opportunities for improvement abound.
How to Advance Your Skills
Finance and Procurement should collaborate in the development and execution of cash management strategies. If cash is king, then managing it well is “aces.” Cash management must become a core competency for all finance and procurement teams. CPOs seeking inroads with the CFO are wise to pursue this discussion with finance and introduce all of the different strategies that it can execute to improve cash management. Likewise, CFOs seeking greater control of and visibility into cash positions (i.e., all of them) are wise to pursue this discussion with procurement. This dialogue should ultimately build into a collaborative partnership around a flexible cash management program that reflects the changing enterprise, market, and trading partner needs (i.e., as days become richer or poorer days).
Procurement professionals can work to develop an understanding of the impact of different procurement-driven strategies that have a real cash flow impact including those listed above and also understand how the impact of these strategies on cash positions, on budgets, and on the general ledger. By developing this financial acumen, procurement professionals can make a strategic and more visible impact on operations (and on cash, of course) by identifying new opportunities, establishing the right policies, executing the strongest strategies, and utilizing the right mechanisms to track and enforce the activity.
Reprise – “Cash Rules Everything Around Me” (Wyclef & Niia)
