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The secret to cash flow management: Keep it simple

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Such is the difficulty of the finance director’s role that even the title of the “Entrepreneurial FD” conference, held by Real Business’ sister publication Real Deals on November 27th at the London Marriott Hotel Grosvenor Square, proved controversial.

“I would feel a deep sense of unease as a private equity investor if an FD described himself as ‘entrepreneurial’ on his CV,” said Simon Mason, associate director of Endless, who chaired a panel at the event.

The term “entrepreneurial” suggests risk-taking, something which, after all, most investors would rather the finance department leave to others. Cash management, on the other hand, is without any doubt a primary concern for any FD.

“A lot of businesses I have seen have tried to over-intellectualise cash flow management,” said Zoe Tindall, finance director of listed restaurant group Pho. “I would advise any FD to keep it simple. Looking at cash flow statements on a monthly basis doesn’t really tell anyone what’s going on. You need to look at inflows and outflows week by week. You need that level of detail, particularly if you’re in a business that is struggling for cash, so you know which suppliers you can turn on and off and what levers are available to you.”

Furthermore, never underestimate the importance of instilling a culture of prudent management across the whole business. “When the business is going well, the culture is really important. It means any problems can be quickly resolved. More importantly, once the business gets into problems, if the culture is not there, it’s too late. You need a completely different approach to cash. You need to know what are the ten transactions that are going to kill the business tomorrow,” says financial consultant Peter Charles.

This is, of course, especially important for private equity-backed companies, which tend to be highly leveraged. “Debt finance is good for a business. It creates discipline. It focuses the business on cash and creates that culture in good times and bad,” adds Paul Bosson, chief financial officer of Masternaut.

This culture has to come from the chief financial officer, and trickle through the rest of the management team and employees. Charles says one of his clients takes two weeks from the supply of the service just to produce the invoice. Moreover, the company is sometimes paid in advance, other times in arrears, but monitoring is so poor, they don’t really know where they are. “That’s a matter of focus from the CFO. Without that, it simply won’t get fixed,” he adds.

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