Cash Generating BehaviorWe all know that cash is king, but what does that actually mean and what are the behaviors that drive that ethos? More specifically, how do you establish those behaviors across a business with a diverse set of functional objectives, not to mention the varying capabilities and personality types that may exist within the business?

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When you think of high-performing organizations, it conjures up images of a dynamic group of people working to a common goal. These individuals will typically display high levels of tenacity and drive; they will be comfortable operating both within the detail and at a more strategic level.

Above all, the high-performing team will have a clear focus on an end-game and they will each understand how they personally contribute to the achievement of that objective. And it remains true that what gets measured gets done. When this measurement is accompanied by an incentivization scenario, it gets done quicker.

 

Cash-Generating Behaviors Initiative in Underperforming Companies

Underperforming companies often exhibit some of the worst behaviors. Often it is these behaviors that have resulted in the organization’s current predicament. However, instead of management taking decisive action to address these behaviors, the behaviors can become ever more entrenched; silo walls become higher, the politics of business grows fat on the excessive diet of blame and mistrust. Often, management seems either unwilling or unable to act:

  1. Do they not see these behaviors for what they are?
  2. Do they feel powerless to address them?
  3. Are they as entrenched in these behaviors as the rest of the organization?

 

In many cases, management do see these insidious behaviors and do try to address them; often with limited success. So this raises the question:

“How do you drive the right behaviors?”

 

A simple question, surely? It is just about managing the team effectively; up-skilling them, effective measurement and reward systems, effective communications, isn’t it? But there are countless examples of best intentions not working, here are two:

1. One CEO, concerned at the level of invoicing errors, decided to penalize any sales person who raised more than three credit notes in a month. Clearly the desire was to improve the quality of order acceptance and invoicing. Instead, Sales stopped issuing credit notes once they had hit their limit of three; there was no change in the quality of order processing!

2. One Director, determined that the secret to improving collection performance was to improve the work rate of the credit team. Targets were set and bonuses paid based on the number of cases closed. As a consequence, the easier, low-value cases were prioritized. The result was poor cash collections as higher-value cases remained unsettled.

The reason for such failed initiatives varies but tends to fall into one or more of the following categories:

  • Conflicting objectives – failing to establish shared objectives across a value chain (e.g., sales to cash), or not making connections across value chains. The end result is quite often an entrenchment of functional divides or silos.
  • Outcome obsessed – focusing on the desired behavior without taking care to understand what drives the current undesirable behaviors. This can lead to incentives that have no chance of delivering the intended behaviors. You must try to understand why individuals exhibit certain behaviors if you wish to change those behaviors.
  • Unconsidered solutions – acting instinctively without asking the question “What is the worst that could happen if I do this?.” This can result in undesirable behaviors that do not facilitate the business objective.

 

Where Do Non-Cash-Generating Behaviors Come From?

To understand where behaviors come from, you need to look further than the personalities of the individuals concerned. You need to look at the organization holistically. If you take the concept of “Team” and break that down, you start to see the emergence of one possible cause. A team could be defined as “a group of people working to a common goal.” But what is that goal? Is it clearly defined? Is it really a ‘”common goal”? Take the sales to cash process and consider these “common goals”:

  • To maximize profitable sales – a good start! The business is aligned with the objective of maximizing sales, minimizing dilutions and reducing bad debts. But what of maximizing cash and improving efficiency; where do they come in?
  • To maximize earnings before interest and tax (EBIT) – again, where does cash come in? Interest saved on borrowings comes below the EBIT line.
  • To ensure that customers’ invoices are paid on time – now you are talking. But hang on, how do sales people relate to that? As a salesman, do I need to start chasing debts? Do I turn down profitable sales because the customer wants extended payment terms?

 

In many businesses the overall objective will often be to maximize sales or margin. But typically each function within the business will have its own specific objective or reason for being. In many sales-driven businesses, for example, the role of Finance is to look after the money and let sales and operations do the core business activity. The result is functional objectives that are not necessarily aligned or linked in any way. And this can breed undesirable behaviors.

And the danger of creating apparently conflicting objectives across a value chain is that those individual goals create individual teams; you have now created a differentiator or divide between groups of people. Rather than one team across a business or value chain you have several teams. In essence you have created a competitive environment where each team is striving to outwit and outperform the others, but not necessarily to the benefit of the business as a whole.

 

How To Change To Cash-Generating Behavior

The solution is to establish a link between apparently conflicting objectives to create one shared objective, ideally, throughout the organization. Consider the objective that “I will maximize the quantum of our cash position.” On the face of it, this is a traditional Finance department objective. But think about the linkage across value chains:

1. Sales, will continue to pursue sales in the knowledge that more sales equals more cash – but only if sufficient care is taken to ensure that cash is not wasted due to increased costs associated with rework or bad debts. Furthermore, they will be acutely aware that longer payment terms reduce cash in real terms but also increase the exposure to bad debts.

2. Production, will be encouraged to pursue cost-efficient production schedules whilst optimizing stock holdings.

3. Purchasing, will drive for the best price with the best payment terms but will guard against deals that result in increased rework costs or increased stockholding requirements.

4. Infrastructure, IT and HR, will be encouraged not only to provide the infrastructure required for the business to meet its objectives, but it will also be encouraged to reduce the costs of the services it provides. For example, when you start to challenge how you use your real estate you can uncover opportunities to reduce or reclaim business rates from under-utilized space.

5. Finance (accounting, treasury and tax), can undertake a role that not only tracks the finances but is also challenged to look at how they contribute to cash. For example, have you fully explored opportunities to delay or reduce the tax cash outflow of the business?

Payables and Receivables are driven not only to maximize the cash position but also to strive to reduce the costs involved. But more than this, you might also expect to see a more commercial attitude to credit risk for example.

Clearly, these functions are still focusing on the things that have always been important to them, but, by finding the linkages to a common objective, in this case “maximizing the quantum of cash,” you establish the common bond between turnover, margin and cash. In reading this, you might expect a good number of executives to say, “Yep, we have many of those behaviors in our organization,” and expect to receive a pat on the back for doing so. But before that, consider this:

  • To what extent are you displaying these behaviors and, even more fundamentally, if you can’t tick all the boxes, can you really say that the business is fully aligned to a common objective?
  • Now that you have identified a common objective, the hard part starts. How do you embed this objective within the business and what do you need to do differently in order to establish behaviors consistent with our objective?

The key to changing the behavior of individuals is to ensure that they understand and trust in both the objective and the behavioral change required. For example, will an employee truly believe in the business’s cost-cutting drive if the Chief Executive continues to fly first class? Essentially, the objective and behavioral change required must not only be preached from above but must also be undeniably exhibited from the Chief Executive downwards. This will be clear from the messages and communications to the business but also in the measurement and reward systems implemented. You need reward systems that reflect the shared objectives and reward behaviors that are consistent with the objective and penalize those that are not.

But again you must guard against complacency here. The moment you think that this is easy, or the answer is obvious, you miss some key component and everything goes horribly wrong.

In the book, Freakonomics, the authors Stephen Dubner and Steven Levitt discussed how a childcare provider introduced a financial penalty for the late collection of children. Unfortunately, not only did this fail to encourage prompt collection; it actually resulted in an increased incidence of late collection.

This happened because the organizers assumed that a financial penalty would be an adequate incentive; instead, it established a mindset in the parents that extended childcare was available at a cost and as such they did not need to feel that parental guilt they had previously associated with a late collection.

 

What Can You Hope to See From Cash-Generating Behavior Pursuit?

A business that adopts this common objective and establishes the appropriate, desired behaviors will expect to establish the type of culture associated with the best-performing businesses. You could define an extensive list of attributes including the words tenacity, drive, commitment and teamwork. However, when you take a more strategic view of the business you would expect to see:

  • Cash is at the heart of the business – Sales retain the drive to maximize sales and margin but have also bought into the finance mantra that ‘a sale is not a sale until it is paid for’. Credit Control take it as a personal affront if payment is made late and leave no stone unturned in their efforts to secure prompt payment of all monies due, while the rest of the business visualize the cash impact of their actions whether it be the costs they incur or inefficient processes.
  • A keen eye on cost optimization and control – But this is not the radical slashing of costs for the sake of saving money. This is a pragmatic attitude to incurring cost that is demonstrated at all the levels of the business. Individuals are aware that any cost in the business needs to make a return and the greater that return the better. This can extend to the management of credit risk and bad debts. For example, a haulier business that is expecting an empty lorry on a return leg might sell that space to a high-risk customer on the basis of (say) 40 per cent payment in advance and the remaining 60 per cent on credit terms. It is true that the 60 per cent is at risk; however, the 40 per cent is almost entirely profit in a scenario where the return leg would have been a 100 per cent cost to the business. The remaining 60 per cent has no cost attached to it; therefore, you have lost nothing if the debt becomes bad.
  • An unerring focus on customer satisfaction and quality – You will see cross-functional working parties addressing the underlying cause of error and inefficiency. The business lives by the ethos of continuous improvement; effectively there is always an opportunity to do better. For example, the business will not be happy at having the lowest days sales outstanding (DSO) or the greatest margin and market share in the industry. The business will be constantly looking for opportunities to improve margin and cash.

 

Whilst these could be seen as potentially conflicting behaviors, in the high-performing business they are likely to be linked by, for example, their relationship to cash. The high-performing business will ensure that these behaviors exist in perfect balance. The risk, if this balance is lost, is that one of those behaviors will be dominant at the expense of the rest. If this happens, the business is unlikely to achieve its full potential and may be more susceptible to changing economic and market conditions.

 

Do You Have The Courage To Make Change to Cash-Generating Behavior?

One of the most common obstacles to change is Executive inaction. This is typically due to ignorance of the issue or denial, which often materializes as a refusal to accept responsibility for delivering change. Denial is one of the most common reasons that you encounter for inaction and for which there are many underlying reasons:

  • One Finance Director that you worked with agreed with our assessment that debtors could be reduced by changing business practices and behaviors. He also agreed with our assessment that this could release £27 million of cash during the course of the next financial year. However, his reason for doing nothing was that he was not under pressure to deliver any working capital improvements.
  • Another Finance Director was concerned that the existence of opportunity within his area of control, working capital, would result in him attracting criticism from his peers; the greater the opportunity, the greater the criticism. In this situation, the Finance Director may choose to quickly usher us out of the door and hope that no one notices the opportunity.

 

These are just two examples, amongst many, where decisions to act have been deferred because the business leaders have lacked the courage or vision to stand up and make a difference.

Let’s consider that last example again. There is an alternative solution that demonstrates not only courage but also an understanding that whilst the management of cash may lie within Finance it is the behaviors and working practices across an organization that determine its quantum. In this case, that Finance Director might choose to embrace the challenge and take responsibility for tackling the underling causes, many of which are outside of his direct control.