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How a sustainable cash culture can drive growth

Freeing up cash on the balance sheet may be hard, but companies such as Johnson Controls are finding ways to establish a sustainable cash culture.

In brief

  • Increasing cash from operations requires a corporate culture shift with guidance from the C-suite and every employee buying in.
  • Depending on a company’s global footprint and operational complexity, a holistic, targeted or phased approach may be warranted.
  • It’s like running a marathon: Johnson Controls saw that goals and a dedicated process can lead to working capital improvements.

Releasing cash on the balance sheet and improving liquidity are powerful tools that can be accomplished with a clear, disciplined corporate culture shift in this unprecedented global economic environment.

Establishing a cash culture can be a challenge, however. Nearly half of the 2,100 participants in a recent EY webcast featuring Johnson Controls (JCI) said that the biggest obstacle rests with managers and employees connecting business functions and their impact on cash. Another third of the participants said that siloed business functions are a significant challenge to creating a cash culture. 

For complex, multinational companies that have expanded through mergers and acquisitions like Johnson Controls, which operates in more than 95 countries, hurdles include connecting business functions and doing so over a vast geographic footprint, said Michael Wysong, a Vice President, Enterprise Transformation, and Global Financial Operations & Cash Management Officer at JCI. But JCI, which experienced a free cash flow (FCF) decline in 2017, successfully turned its cash position around after defining the goals and benefits of focusing on a cash culture.

“It’s about the art of the possible, about peeling back the onion for the cash you can extract at the SKU level, the product bar code, converting inventory to cash and not offsetting it with payables,” said Wysong.

Expand the cash mindset

JCI created a cash leadership office (CLO), which managed cash initiatives and integrated efforts across its organization. The process began with expanding the cash mindset among operational leaders and then implementing targeted initiatives across Procure-to-Pay, Order-to-Cash and Forecast-to-Fulfill operations to improve FCF. The system-wide mantra for all employees: every time you make a decision, how does it impact cash? The method at JCI was holistic, with executive-level, operational and tactical approaches that employed cash management and working capital metrics. The result is sustainably improved liquidity and cash management practices.

JCI comprehensively addressed working capital headwinds. But a third of the participants in our recent webcast said that they preferred a “functional organization focus” on cash and working capital centered on the finance department. And one-quarter of the participants said that spot improvement projects that focused on key problem areas were sufficient.

 “Big bang or staggered, it is a team sport. Everyone has to be involved,” Wysong said.

When it comes to expanding an effective cash program, those we surveyed in our recent webcast were divided:

  • More than a third said that they would use standardized processes and tools across the globe and regionally.
  • More than a quarter said that they would employ the CFO and finance department in a top-down approach, but an equal number said that they preferred a bottom-up approach with cash-focused initiatives.
  • Only 9% said that the C-suite should set cash targets. Wysong said that he would choose all of these options.

Initially, “processes, tools and policies come with a standardized approach, then bottom-up cash-focused initiatives result in six to seven months. And the C-suite has to set cash targets,” Wysong said. JCI steering team meetings with CFO and CEO participation sent a message, and everyone came prepared.

How EY can help

Other critical factors in a successful cash culture transformation include cross-functional accountability, cash objectives integrated with other business priorities and baseline metrics. The goal is sustainable change so that, when the program sunsets, the CLO has been an evangelist to business operations, but not a crutch. Wysong offered four strategies from JCI’s journey that were critical in setting up a CLO and establishing a cash culture:

  1. C-suite participation will be critical. The CLO leader should report to the CFO or CEO and provide regular updates. “Having a direct report is important versus being buried in Treasury or somewhere else. And the tone at the top is so critical to success on cash.”
  2. The CLO leader can be a company veteran with a network, internal knowledge and broad influence. “There is no way we could have pulled it off by hiring someone from the outside.”
  3. You will need to have many arms and legs, because there is a lot of heavy lifting: presidents, general managers, salespeople, collections, materials, tax and others, globally. “Everyone should think the balance sheet is important.”
  4. Set up a good cash forecasting process. “Most can do well with revenue and EBIT but forecasting changes in cash from one period to another is difficult.”

In total, it took JCI two and a half years to instill a culture, and roughly one-third of the cash production came from accounts payable. The last year, Wysong said, focused on business-unit ownership and process maintenance, including forecasting and extracting tools that create a true north star in what otherwise can be a sea of data. Training and awareness are vital.

 

Conclusion

 

JCI took a hard look at its expansive business and decided to “go all in” on creating a systemic cash culture. Other businesses may employ a more targeted approach, but, regardless of the strategy, imbuing a company with a strong cash culture can create liquidity needed to invest in growth. Cash is still king.

Thanks to Shawn Ryan, Senior Director, Strategy and Transactions, Ernst & Young LLP, for his contributions to this article.

Summary

When it comes to generating cash from operations, every executive should understand that cash generation is as important as profit margin and revenue growth. Cash goals are often small improvements, but, combined, they can help organizations attain significant financial gains.

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