Three Strategies for Building a Cash Culture: From Data-Driven to Continuous Improvement

This article is a contributed piece by Peter Kingma, EY Americas Working Capital Advisory Services Leader. The views expressed are solely those of the author.

Running 26.2 miles may seem out of reach for many, but it is achievable by starting with short runs and gradually progressing toward the marathon goal. The same approach applies to building a cash-centric corporate culture.

EY-Parthenon Working Capital Advisory Services estimates that approximately $2.5 trillion is locked up in working capital across companies in Europe and the United States. Releasing this cash can help achieve strategic capital allocation goals.

Leaders looking to improve their balance sheets and create a cash culture can set ambitious goals, much like aspiring to run a marathon. The initial stages may be full of obstacles and complexity, but persistent improvement will build endurance and ultimately lead to success. The key is to challenge the organization by using advanced analytics, eliminating complexity, strengthening processes, and motivating employees.

Based on my experience working with CFOs of various types and sizes of organizations at EY Americas, I recommend three steps to begin the journey of building a cash culture.

Set data-driven goals

Too often, companies set performance targets based on simple increments over past performance or rely excessively on benchmark comparisons. Both approaches underestimate the art of the possible. If my longest run last year was three miles and I set a goal to increase it to five, I might never become a marathoner. Benchmarks can also be misleading because a peer group may be underperforming in generating and retaining cash. Instead, I recommend using analytics to determine cash entitlement. For example, if every customer paid in full by the due date, that represents the cash the business is entitled to.

The gap between actual collection performance and enhanced collection performance should form the first set of goals. While this example is simple, the concept is quite advanced and achievable with new analytical tools. You can apply these techniques to areas such as inventory management, commercial terms, procurement, and capital expenditures. The key is to use data more effectively and aggressively to set targets. This is a bottom-up view of cash generation and consumption.

At the same time, we should not over-rely on net working capital. Some businesses have divisions or segments that operate more efficiently than others. A global industrial company had one business unit operating with negative working capital. When compared with peers at an overall level, the company seemed to have little room for improvement. But when leaders isolated the negative-working-capital business unit and focused on the others, they unlocked hundreds of millions of dollars in cash, which supported a share buyback program.

Focus on accountability

To run a marathon, you might start with three miles a day, increase to five, and run with a partner to enhance accountability. Similarly, businesses can measure progress against targets to promote accountability. What happens if you miss your five-mile runs for two weeks and the plan calls for a seven-mile run? To foster accountability, it is important to use metrics that reflect gradual progress. For example, suppose a company uses the percentage of overdue accounts to measure accounts receivable health. This approach may miss early indicators of many problems and could miss opportunities to increase cash flow within the month. If someone owes money on the sixth day of the month but pays on the 26th, and I only look at month-end aging (which often happens), the situation may seem normal—but I missed 20 days of cash and early warning signs of customer issues.

Organizations with a cash culture use metrics to maintain accountability and understand the importance of identifying people who have decision-making authority over cash. They adjust key performance indicators (KPIs) and provide support to help employees make informed decisions. A good example: a buyer negotiated a favorable price for materials needed in production but agreed to minimum order quantities or longer lead times without fully understanding the impact on replenishment needs. They may have achieved their cost-reduction goal but inadvertently pushed up inventory and increased downstream costs.

The aforementioned company promoted cross-functional accountability, making cash goals as important as other business priorities and metrics. Cash targets were set by the company's CFO. This prompted business units to examine all areas that generate or consume cash, such as taxes and capital expenditures.

Encourage continuous improvement

When I first ran a marathon, my goal was to finish, and I didn't really care about the time. But once I knew I could run that distance, I shifted my goal to improving speed. Generating and retaining cash from operations should be as important as other key business objectives. Strong cash flow provides companies with many opportunities, including paying down debt, reinvesting in the business, and returning cash to shareholders. Leading companies understand this, and our research shows that businesses in the top quartile of cash performance can widen the gap with underperformers. These companies use data to set targets, adjust metrics and measures to promote accountability, and empower employees to make informed decisions. They also generate cash more efficiently by focusing on reducing complexity and using digital capabilities to achieve the same or better results with a lower cost structure.

In the global industrial company I mentioned earlier, the focus on cash has evolved from a project to part of its business operations process. And progress in cash generation is one of the factors considered in executive compensation.

A true cash culture requires commitment and discipline, similar to training for and racing a marathon, and continuously improving results with each race.

The views expressed by the author do not necessarily represent those of Ernst & Young LLP or other members of the global EY organization.