How Do I Improve Cash Flows in My Company?

Loan Cash to Corporate Operating Units To Improve Cash Flows

In most corporations the cost of money affects the ability to compete successfully. If money has to be borrowed then the financing cost has to included in the cost of operations and ultimately will affect the cost customers have to pay for goods and services. This, of course, impacts the ability to compete in price aggressive markets.

There is always a demand for cash in a corporation and there are many ways it can be used.  Every manager will have programs that are deemed important and will be viewed by that manager as being most worthy of being funded.

In the budgeting process cash needs are generally forecast based on projected sales and the expenses required to support those sales. When there is a need for cash beyond normal cash inflows, debt is usually employed to fill the gap.

A particularly vexing challenge is deciding how to maximize cash usage.  GWR Research developed a system that allows a manager access to any level of cash he/she believes is needed but charges interest on funds that aren’t used efficiently. The definition of cash efficiency will vary from organization to organization and is expressed in a mathematical formula.

The key to a successful cash management program is to have a base level of cash available to managers for normal operations supplemented by a self-adjusting formula based on efficient cash usage. The base operating level will automatically be increased or decreased based on the managers’ efficient use of cash.

The GWR Research method was first used for a grocery chain that wanted to build a new milk plant in San Antonio, Texas but didn’t want to borrow money. The CEO felt there was enough cash flow in the 120 stores to free up the money to build a milk plant.

A senior team had been working on developing a cash management system for a couple of years but hadn’t come up with a system that could be implemented successfully. Most of the approaches centered on the frequent harvesting of cash from registers in the stores and sending the cash to the local banks. The corporate office would then collect the cash from the various banks. What made the system impractical was the inability to accurately predict the amount of money each store would request for the next day’s operation. Even if cash were harvested hourly from the stores, the managers might request an amount equal to or greater the next day for store operations. Stores needed cash to buy local inventory and cash customer’s checks. Store managers did not want to disappoint customers or be unable to purchase local inventory items when they were needed and in many cases requested ample amounts of cash to insure they could serve their customers.

It occurred to me that corporate managers shouldn’t be involved in managing the cash at the store level. I gave it some thought and proposed a system that treated money requested by store managers as a loan from the corporate office. We established the loan rate as the same as charged by a bank. Store managers were told they could withdraw as much as they felt they needed without any interest charge as long as the money was efficiently used. Efficient use meant that if all of the money requested above the established target for the store were converted to inventory or checks, there would be no interest charge. Formulas were developed that would adjust the cash withdrawal limit for each store based on efficient use of cash.

Each store’s withdrawal and deposit history was analyzed and was the basis for setting withdrawal targets for the store managers.  If a store requested more than the withdrawal target for the store and re-deposited cash, this excess cash was considered inefficiently used and received a penalty or interest charge. These interest or penalty charges were considered part of the store’s operating costs and affected store managers’ annual bonuses.

This approach involved store managers in controlling cash throughout the system and focused on efficient use of cash. The system, once implemented, freed up the cash needed to build the milk plant.

For more information on how to implement this approach to cash management and the development of self-adjusting formulas contact me at gary@gwrresearch.com,