5 steps to building a cash culture

Cash is key to building a sustainable business.

In brief

• Focusing on cash flow management can enable entrepreneurs to fund growth and expansion plans.
• While driving greater revenue is important, sales teams also need to guard against offering payment terms that are too lenient.
• Cash flow often becomes one of the key factors for establishing future valuations.

Many new companies tend to overlook the importance of establishing a strong cash flow, focusing instead on selling products and generating revenue. While these are important goals during the early days of the enterprise, organizations eventually need to achieve a strong balance of cash coming into the business at the right time so it’s available when needed. Building and nurturing a cash culture is a key part of this transition.

2) Focus on balance sheet, not just the P&L

Many business leaders find the concept of driving revenue and building a strong profit and loss statement easier to grasp and evangelize than establishing a strong cash flow. Few entrepreneurs start a business to manage things like receivables and collections, so they all face a challenge of making sure their teams are excited about this sometimes boring but quite important topic. “Executives need to realize that you can have a profitable company but still be cash flow negative,” Kemper says. “That will lead to serious problems in the future.”

3) Don’t become an interest-free bank

Trying to generate sales at all costs may create more problems down the road if an organization is too lenient on terms. Companies that carry excessive DSO (days sales outstanding) over 60 days are providing interest-free financing for their customers. While that may help to generate new business at first, it’s not a viable long-term strategy.

4) A healthy business maintains a positive cash flow

Organizations need to develop operational metrics and incentives that support a strong cash flow. Saligram has observed that many companies do an excellent job of explaining why revenue and profitability are important, but then “do a poor job of explaining the role people play, both positively and negatively, in the generation or consumption of cash.” One solution is to encourage sales managers to secure sales terms that include a large down payment, says Yollande Tchouapi of Johnson Controls. “We shifted our incentive plan from pure revenue to include a component of cash collected and also looked at the quality of billing, such as sending a clean invoice to the customer,” she says.

5) Have rational conversations with clients about cost structure

In some situations, business leaders need to sit down with customers to explain their cost structure and why they need payment on these terms. “Be thoughtful about explaining your cost structure,” Tchouapi says, “and if you can’t negotiate new terms, then get your pricing right.” A company that establishes its payments cost structure and terms correctly can often set the stage for a healthier long-term relationship with the client.

Entrepreneurs should also remember that their future valuation may depend on how well they handle cash flow. Investors typically consider discounted cash flows as a sign of future financial health. “Companies that generate more cash are really seen as the ones with higher multiples,” Kemper says. “When you’re planning an exit strategy, you need to keep cash top of mind.”

Bottom line, a strong cash flow plays a critical role in helping companies be more resilient when times are tough and in funding growth during good times. That’s why building a cash culture needs to be on the to-do list for all businesses, especially startups.