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on MY mIND

cash Flows


R Sampath Group CFo atpl Group including Reime africa

It is expected that every employee thinks of the organisations cash flow in the same way as each one thinks of his or her personal cash flows. Employees must feel a sense of belonging to their organisation by demonstrating behaviour which is similar to the one they display in their own personal life, or business. however, this prudent behaviour is often missing in the employees. the organisation engages the employee as a custodian of the organisations assets (be it financial, or non-financial) and, in a way, each employee is a trustee of the organisations wealth. the employees are accountable and responsible for safeguarding the organisations wealth and assets. their designations do not display their power, position, and authority alone; but actually display their accountability, Responsibility, and ownership that they have as Custodians of the organisations assets! Employees acting with prudence alone can appreciate this and work unselfishly towards increasing shareholder value year-on-year; ash-flow and creating free cash-flows which open up opportunities to grow the business, and allow it to venture into new areas. only when the management is a discipline which each business grows or expands, every stakeholder (employees, customers, lenders, suppliers, and shareholders) will benefit; it will open up one of us has learnt avenues to expand their business and / or, their personal wealth. the reverse, of a single employees growth leading to an organisations over the years in our growth, is not possible and sustainable. own personal lives. It therefore, it is pertinent to look at ways to improve an organisadoes not require any tions free cash flow and grow its net worth each year. Cash-flow management is a discipline which, each one of us has learnt over the special coaching years in our own personal lives. It does not require any special coaching or training. Nor does it require a smart financial wizard to do it.

n our everyday life, it is extremely important to watch our free cash-flow. Free cash-flow facilitates many investment options both in our personal life and in professional life. Just as we are constantly working to increase our personal net worth year-on-year, it is equally necessary to do the same for the organisations that we are working in.

Discipline alone, can make it happen

Dos and donts

the following are some thoughts on how to make free cash-management a discipline for businesses: l Every month the cash generated from operations termed cash profit must be set aside in a separate bank account and not utilised for any purpose except with the authorisation of the board or its authorised personnel. this money shall only be used for the following: 1. discharge of loan obligations or for pre-payment of high cost loans; 2. investment in new business that can earn more than 1.5 times the interest earnings, and; 3. dividend payments, among others. l You may well ask, if this is so simple then why are businesses not able to do so year-on-year? the main reasons for not being able to do so are the following: 1. Cash profits get locked up in increasing current assets (inventory and debtors); 2. delay in recovery of overdue payments from customers for a variety of reasons due to

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product quality, excess supply, poor project management and execution, and poor after-sales service, and lack of Customer Satisfaction (CSat); 3. insufficient focus on collections from customers, and customers inability to pay on due dates; 4. lack of good forecasting process leading to wrong production planning, poor materials planning and procurement; and, above all 5. insufficient focus on cost and capital management. l organisations have to realise that they are in business to make profits and create value for their shareholders, and not just work for the lenders. the leadership team must ensure that the organisations internal processes t is prudent to from order-to-cash and procurement-to-pay are well defined and regularly reviewed to safeguard its assets. focus on cost and l It is also critical to address the cost and capital management. capital management most companies go through boom and bust periods of expanat all times so that sion or investment in good times, followed by cost cuts when there are no surprises the market becomes sluggish. It is prudent to focus on cost and capital management at all times so that there are no surprises when the business when the business becomes dull. this also builds employees becomes dull confidence as there will be no emergency cost reduction drives during downward market conditions.

In summary the key actions to stay focused on free cash are the following: 1. Ensure you put in every months cash profits in a separate bank account and utilise it only for the purpose of: (a) repayment of loans; (b) investment in new business including in R&D activities; and (c) dividend payments;

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2. Keep a close watch on costs and capital utilisation whether it is a downturn or boom time, ensure your cost structure is optimised. this clearly means spend what is important for business development and growth, and never commit to costs that have no benefits. It is also important to keep fixed or structural costs low in proportion to overall costs. the higher the variable or developmental costs the better to be profitable at all times; 3. Regular follow-up with customers to recover the overdue amounts. this activity also presents the opportunity for the organisations to understand customer expectations and the feedback organisations get enables them to improve orking capital product quality and delivery; creates cost competitiveness; focuses management must them on service performance, customer process for approvals and payment (documentations required for payments), and finally what become a way of the customer needs from time to time. Knowing customer need life in our daily life. on an on-line, real-time basis helps organisations to innovate and It will not take more develop products and services to grow their own businesses and make it sustainable. than 30 minutes for you will each leader to review 4. Finally, keep a close watch on working capital waste and never know when a particular inventory will become a when the status of various a customer receivable becomes doubtful, unless you are on top of it every day. In order to manage the working capital, which is really activities cash in business, there should be clearly set targets and reviews vis--vis targets. Working capital management must become a way of life in our daily life. It will not take more than 30 minutes for each leader to review the status of various activities that they are required to do to meet their working capital targets. the rigour of planning, setting targets, and the review thereof, with appropriate corrective actions, will ensure the most effective working capital management. Working capital management alone can drive the profitability of any organisation.

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