Inflation giving you headaches? Cultivate a cash-centered culture at your company

Because inflation’s forced the Fed to raise interest rates, making the cost of capital higher, it’s mission-critical to carefully manage the cash your company has on hand to avoid going outside your own cash flow for working capital.

That’s the word from consultant, author, former CFO and self-described conservative accountant Carl L. Young.

In the ResourcefulFinancePro webinar “How Finance Leaders Fight Inflation by Optimizing Working Capital,” Young drove home these keys to building a cash-centered culture in order to weather an inflationary business environment.

Bust inflation with short cash-to-cash cycle

You’ll need to set a short cash-to-cash cycle benchmark that’s both a good fit for your organization and settles your in-and-out cash flow toward a state of stable inertia.

A slide from Young’s presentation offered this as an example:

• Purchase inventory September 1
• Use it to provide goods and services October 30
• Collect cash from customers December 15.

Having solid fintech that connects your cash-related transactions will help get you there, Young said.

“If you can get (accounts payable and accounts receivable) into a paperless, transactions-based platform, then you can do a lot. You can greatly improve your ability to manage your cash in real time,” he said. “You have the visibility of all the transactions as they go through the system. And you have the ability to interact with them and you can make your cash decisions as transactions go through the process, rather than waiting until the end of the process (reconciling transactions with cash flow).”

Evaluate cash flow efficiency

Keeping cash top-of-mind in all your decisions – even if it means postponing expenditures that have already been approved for the budget in favor of a more optimal purchase – will also be essential to coping with inflation.

“You’ve got to make absolutely certain that you’re always spending your cash for the best business purpose possible,” Young commented.

Ask yourself these questions with your internal cash situation in mind:

• Is our inventory turning over too slow?
• Do we have too much inventory?
• Are there ways for A/P to make payments more efficiently?
• Are customers paying their bills on time?
• How much cash on hand do we need right now to support sales and operations?

Cash-to-liability numbers to shoot for

To promote and maintain a cash-centered culture in times of inflation, Young recommended using a modified, conservative ratio of cash/cash equivalent to current liabilities above 1:1. The sweet spot’s between 1.8:1 and 2:1, he said.

Using that ratio as your guide, that can speed up your billing process and drive the conversion of accounts payable and inventory to cash.

You should also let your key stakeholders in on what your strategy is for improving company cash flow and how they can help achieve it.