Dominating Cash Flow

I want to start by explaining the concept of a dominated or controlled process from the perspective of Statistical Process Control, a method used extensively in manufacturing and the foundation of today’s Six-Sigma.

Six Sigma

A dominated process is both stable (only random causes in play or in other words both the Mean-X̅ and Variance-s are within the ±3σ control limits) and capable (a Six-Sigma process with 3.4 Defects Per Million Opportunities or in other words a process with a Cp of 2,0 and a Cpk of 1.5). The first step is to achieve stability by gradually eliminating all the assignable causes and the next step is to improve the capability by reducing the variability of each of the causes contributing to the outcome. I will explain this in more detail in another blog, but today will focus on dominating cash flow on the same lines, I have worked on improving the stability and capability of manufacturing processes for more than 25 years.

Let us say that as a business, the ideal condition would be to maintain a cash flow coverage of 6±3 months. This means that the weekly average cash flow coverage can vary between 5 months 1 week and 6 month 3 weeks, with the total variation being just 4 weeks 95% of the time. We have two challenges here.

The first is to ensure stability, for which these 11 approaches can be used:

  1. Publish working capital turns or working capital coverage: Visualize for sensitivity.
  2. Manage and control receivables: 100% within agreed T&C and most ASAP.
  3. Manage and control payables: 100% on the last day as per T&C.
  4. Manage and control inventory: Walkthrough to clear nonmoving and slow moving.
  5. Manage and control budgets: Ensure only A and some urgent/important B items, as exception.
  6. Manage and control purchase orders: Ensure only quantities needed for confirmed customer orders are considered with just-in-time planning.
  7. Reduce number of authorized signatories: Reduce the variability in decision making.
  8. Daily/Weekly bottom up cash rolling plan: Monitor and forecast cash flow coverage.
  9. Intensify the frequency of KPI reviewing: Maintain focus and consistency of driver metrics.
  10. Develop subscription products/services: Increase regular cash inflow/outflow.
  11. Automate repetitive tasks and activities to reduce variability.

The second is to improve and achieve the capability, for which these 22 approaches can be used:

  1. Change to vendors giving more credit, or renegotiate the credit T&C.
  2. Change to vendors giving MoQ of 1, or renegotiate for 1 MoQ (Note: From the cash flow perspective, even a higher price for 1 MoQ could be favorable).
  3. Sell to customers without any credit, or renegotiate T&C – of course this is a tough task but can work based on the relationship.
  4. Advances on large and/or custom orders, for not eating into the current working capital.
  5. Apply and use tax deferment schemes, which can be done by a taxation expert.
  6. Restructure the debt and reduce EMIs, which can be done by a financial expert. A good credit history will provide the tailwind.
  7. Raise additional funds to increase coverage, while keeping track on new EMIs which will again impact the cash flow.
  8. Reduce inventory with alternate use, this is one of the easiest to increase the coverage.
  9. Convert fixed cost to variable cost, so that the regular burning rate comes down.
  10. Increase the invoicing frequency, so that the credit period starts from the delivery date.
  11. Reduce the payout frequency, so that you can get some benefit in delayed payout. Though this practice exists in the industry, it may not be fair from the vendor’s perspective.
  12. Increase price with penalties, this is a huge win-win approach. Offer penalties for an OTIF (On-time-in-full) delivery other than 100%. Also increase the price for a MoQ of 1.
  13. ABC grouping of operating expenses, by assessing the importance and urgent.
  14. Collaborate and bundle with competitors, a revolutionary possibility, especially for all the standard outsourced competencies.
  15. Explore possibilities of bartering, especially with vendors.
  16. Switch from F2F to virtual platform, for both meeting and workshops.
  17. Make short-term excess cash deposits, to keep earning some interest.
  18. Intensify the VAVE projects, especially to replace special items with standard items.
  19. Increase frequency of largescale interaction with employees for inclusiveness, engagement and inspiration.
  20. Sell excess Assets, Hardware and Software, that is not used and/or excess.
  21. Intensify productivity improvement and reduce the number of working days to work at full capacity for meeting the reduced demand.
  22. Intensify new customer acquisition with enhanced value proposition.

Most of these are just common sense, but many organizations find this a huge challenge, not because they don’t know, but it is because their mindset doesn’t support cash flow. I will breifly explain perceiving, thinking, deciding and acting or responding of the mindset for cash flow stability and capability:

  • Perceiving: Cash flow coverage in a fraction of a second.
  • Thinking: Connects to receivables, payables, budgets, reports, and reviews.
  • Deciding: Strategies for a stable and good cash flow coverage.
  • Acting/Responding: Ø Adhoc, intuitive decisions.

 I will be very happy to clarify further on any of these topics in case you need any further information.

Happy Reading and the best wishes to increase the capability with stability of cash flow coverage!

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