Working in harmony
Breaking down silos to improve efficiencies and preserve working capital.
With the Brexit deadline looming and still no agreement in place, UK businesses are operating against a backdrop of unprecedented uncertainty. Many companies are stockpiling inventory as a buffer. But prudent FDs are also looking to build as much cash headroom as possible to help mitigate the risk – and maximise the opportunities – that this turbulent time may bring.
Preserving the financial health of a business is not only the responsibility of the finance function, however. It is vital that the sales, operations and finance teams all work together to deliver success. Indeed, a “silo” mentality, where departments fail to share information, goals, priorities and processes with other departments, is one of the biggest contributors to business distress that we see.
The sales function is responsible for driving top line growth and is incentivised accordingly. But it is critical that sales teams sell products, or services, that can be operationally delivered in line with customer expectations, at a price that they know will be profitable. It is also vital that contracts are deliverable within a manageable working capital cycle. The two, of course, are not always the same.
Even if a contract is ultimately profitable, if payment terms are too long, or if too much cash is tied up in stock to fulfil it, this will lead to a working capital shortfall which can quickly spin out of control. This can only be avoided if all three functions are cash aware and communicate clearly.
Too often we see struggling businesses, frequently in the manufacturing sector, that get pulled into a death spiral, whereby a lack of sales leads to a lack of cash, which then leads to operational inefficiencies, losses and ultimately cash distress.
These losses can then lead to reduced supplier credit availability, which puts further pressure on the working capital cycle and intensifies the cash crisis. The situation can only be reversed by the critical business functions operating in harmony.
We recently worked with a packaging company that had been moved to the FR&R team after a sustained period of poor trading. A silo mentality often trickles down from the top, and when a new managing director was brought in, he immediately recognised damaging divisional divides within the business and set about rectifying this mindset.
Armed with a better understanding of the company’s underlying cash position, the sales team began to prioritise designing and promoting products that were operationally efficient. In doing so, they found they were, in fact, able to drive better prices for customers because the operational efficiencies created a significant reduction in waste and better margins.
Another common problem that we see within struggling businesses is that the finance function becomes disconnected from the broader company. It’s imperative that finance is an integral part of all business operations and decision making, particularly when the going gets tough. In these times the FD would be walking the shop floor, making sure everyone understands what generates margin and what generates cash.
In the case of our packaging company, a change in sales team mentality was complimented by the finance department coming in earlier in the sales process, helping calculate prices and profit. A complete review of historic works was also undertaken, identifying, and eradicating, a number of loss-making contracts.
This wasn’t a quick fix. The turnaround took time but the FR&R team worked closely alongside the new management team to make it happen and a fundamental change in culture now means that the business transformation is marked and sustainable.
Ensuring a company-wide cash culture, strong cross-divisional communication and a clear sense of alignment between business functions is paramount, particularly in a challenging economic environment. As businesses brace themselves for Brexit, stockpiling raw materials, hedging currency and reassessing risks, the power of collaboration should not be under estimated.
Read the second article of a four part series here: A Leadership Challenge