Cash flow is essential for most companies

23 December 2011

The global financial crisis has made cash a major priority for most companies. But according to the new study "Blueprint for a Cash Culture" from REL, a division of The Hackett Group, many still fail to take the key steps required to build a corporate culture that successfully focuses on cash.

The research found that most companies make cash flow optimization a priority. Of the more than 50 Global 1,000 companies that participated in REL's study, nearly 95 percent said cash flow optimization was critical, and most have cash initiatives in place in three or more of the four key cash areas: receivables, payables, spend management, and inventory optimization. In addition, executives acknowledge that without a cash culture the cash optimization initiatives cannot be sustainable. Yet at the same time, companies admit that they fail to embed the culture in their organization.

Rel consultancy

The study concludes that four dimensions must be in place to ensure a cash culture is in place: organizational alignment and collaboration; executive leadership and sponsorship; measurement and accountability; and incentives and compensation.

  • Companies with steering committees see dramatically higher success rates for their cash programs. Only about 60 percent of the companies REL studied had a steering or project management committee in place. But REL's study found that companies without a steering committee were over three times more likely to describe the impact of their cash initiatives as neutral or ineffective.
  • Executive leadership and sponsorship was also found to be a clear key to success. Nearly 90 percent of all companies in the study where C-suite executives took an active role in cash initiatives reported that their programs were effective. Companies without C-suite support were nearly 40 percent less likely to make this same claim.
  • Companies in the REL study that used more working capital tools to ensure measurement and accountability had demonstrably better cash management. One particular tool, application of a corporate-wide cost of capital, proved a good way to achieve a lower ratio of working capital-to-sales. But less than a third of all companies in the study said they applied a corporate cost of capital to the P&L of business units based on their balance sheet requirements.
  • The most effective companies use employee incentives to encourage better use of capital. Companies that include cash and working capital targets as an element of performance-based compensation programs reported significantly reduced working capital needs. But while nearly all senior managers have working capital targets, only 60 percent of sourcing staff have similar targets, and only half of sales staff.

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