Simple Steps to Improving Cash Flow: Hackett Looks at Working Capital Analytics

Businesses of all types rely on cash, and managing cash flow is essential to determining the health of any company.

Improving the quality of a company’s cash flow can pose challenges to those in charge, but some experts say cash flow management does not have to be too burdensome.

According to a recent study by The Hackett Group, “Cash Analytics: How to Make Your Working Capital Metrics Work,” specific steps can be taken by those in leadership roles to improve their cash conversion cycle and working capital management.

Aside from being a key sign of a company’s profitability, a company’s capability to regularly reach a positive cash flow from its daily business operations is a valuable asset in the eyes of investors.

For those who are new to advanced cash management practices, the study says there are three key areas where executives often get stuck: dealing with the need to develop better metrics for your working capital performance; learning how capital performance metrics are constructed; and learning how to use and analyze such metrics.

According to Investopedia, the cash conversion cycle (CCC) is defined as a metric that expresses the length of time, in a matter of days, that it takes a company to convert its investments in inventory and other resources into cash flows as identified by sales.

Working capital management refers to a company’s accounting strategy at the managerial level. The practice is intended to monitor and use the two components of working capital, current assets and current liabilities, to ensure the company is operating as effectively as possible.

The study’s author, Jennifer Pinney, suggests that following three important rules will enable leaders to improve upon their cash flow management methods.

Step 1

Demystify the metrics. The study says teaching clear definitions of each headline metric to employees at all levels of the company will lead to better results overall. Pinney writes that it is helpful to clarify who at an organization is empowered to review such metrics and correct anomalies.

“Whatever the anomaly, the underlying transactions invariably expose the cause of the problem,” Pinney writes.

She also explained that companies frequently lose time, effort and credibility when they attempt to adjust for underperformance, so it is important for those running the numbers not to make adjustments to compensate for when a customer has not paid as anticipated or a supplier insisted on payment.

“To have a real impact on your cash cycle, you need to teach your cash managers why these metrics matter and translate them into language each department understands,” Pinney states in the study.

Companies often rely on three levels of working capital metrics, the study said. Headline metrics, adjusted headline metrics, and operational metrics help companies to become better informed on their cash cycles, Pinney writes.

Step 2

Avoid transaction paralysis. Pinney said executives benefit from understanding their system landscape and mapping it to their organizational levels. She suggests that leaders analyzing this data extract, filter and map their information with tables that are auditable and repeatable.

Step 3

Pinney also suggests that leaders move quickly from analytics to action. She said it is important to develop a clear key performance indicator review framework that outlines what each KPI confirms and what could be driving its performance. Next, the study suggests that executives direct their teams to take relevant action.

Although understanding a company’s cash flow metrics is not enough in itself to improve working capital, the study states that it is a key first step.

“The multiple layers of metrics drive consistency and visibility across your organization, making it clear that everyone at every level needs to work together to achieve the company’s working capital targets,” Pinney said.