The phrase "Cash is king" is said to have been coined in 1988 by Pehr G Gyllenhammar, the former chief executive of Swedish automaker Volvo. Nearly three decades on, professional services company Deloitte has declared, "Cash is not only king. It's critical."
The rules of working capital management have changed. This is what CFOs need to know.
A balancing act
Run out of cash and your company is in distress. Ironically, when there's too much cash on the books, questions are asked about "war chests", potential acquisitions, lack of strategy, indecision and accusations of resting on one's corporate laurels.
It's all about balancing the balance sheets, managing the relationship between assets and liabilities, and creating a blueprint for working capital best practice. Optimise it and improve liquidity. Ensure that the amount of cash flowing into the business is enough to sustain the company's operations. Free up that available cash for future opportunity without stockpiling.
Benoy C S, director of digital transformation practice for the MENASA region at global research and consulting organisation Frost & Sullivan, says applications to assist exist. He has identified several mega trends influencing the way organisations and executive decision makers are reshaping both their balance sheets and organisational structure by utilising transformational models.
New working capital management models
Digital transformation, Benoy says, is liberating the way organisations are conducting business and the way finance departments are improving efficiency, reducing the cost of doing business, and improving day-to-day operations and performance by introducing automation and cloud technologies.
At the heart of working capital management in this new paradigm is the shift from capital expenditure to operational expenditure.
He uses the example of setting up an IT structure when previously all the hardware and software would be purchased, associated licences bought, larger infrastructure such as servers located on and off site, and departments set up to install, run, maintain, upgrade and expand.
Alongside the initial capex were the fixed contracts with the same vendor, and multiples of wasted licences as bulk purchases did not necessarily result in universal usage across the organisation. The potential for duplication and surplus was a problem.
Payment models are changing as technology provides more fluid, bespoke and less wasteful solutions. Companies, Benoy says, are moving to transaction-based pricing and this will eventually morph into outcome-based pricing.
"Buying any technology is now linked to the internal processes and business outcomes and accordingly spending is also aligned to the way the revenue comes into the organisation. Operational expenditure is also scaled with the scale of the business."
Agile technology for better capital management
Benoy notes the clear shift towards pay-as-you-use, software-as-a-service, economical and scalable infrastructure in the form of public and hybrid hosted cloud platforms, which are all less capital intensive and provide a more transparent, more easily calculable operational expense.
"What this essentially means from a corporate finance perspective is that the spend is changing, the way of spending is changing and also the way of purchasing is changing."
Benoy adds that requiring purchase orders and pre-spending approval is becoming outdated. People are adopting a more dynamic pricing where they are not "hooked on a vendor for a long time so they buy as and when they require."
Benoy recognises that as purchasing goods and services is changing, so too is the internal process of approval authority - less archaic, more consensual and immediate, with more employees becoming more enabled and empowered.
One of the key mega trends Benoy has identified in terms of emerging working capital developments is that the concept of "value for money" is changing to "value for many". The future, he says, is communal, cash conscientious and creative.
He argues that organisations don't want to be saddled with quickly outdating infrastructure. They want the latest model and have a willingness to share infrastructure with similar businesses and like-minded people.
As technology progresses, so too are the progressive questions executive decision-makers are posing, says Benoy. "Work flow is changing, the processes are changing, so how do we adapt to technological change?"
How we automate the process is no longer a concept, but reality. "These certain key trends are actually changing the way that industry is moving forward and every organisation should look at how they can adapt to these changes."
There are now new ways of spending cash with greater visibility in terms of capex and opex outflows. With less wastage on redundant infrastructure, more cash is available to reduce any indebtedness. It can also provide the opportunity for profitability and expansion. Cash, in many ways, remains as critical now as it did in the 80s.
© Oracle 2017
