Lead With Cash: Cash Flow For Corporate Renewal

Cash Flow for Corporate Renewal

Harlan Platt

• Publisher: ICP
• Year: 2010
• Print ISBN:
  9781848163751
• eBook ISBN:
  9781848167216
• Topic: Business
• Subtopic: Business generale
• Index: Business

This book takes an entirely new look at how companies ought to be managed. It argues that managers need to focus on how corporate decisions affect the firm's cash. The author, who is well known in the fields of management and crisis management, suggests that companies that follow the paradigm presented in the book are more likely to survive tumultuous times, provide higher returns to their investors, and have a conducive work environment.

Contents:

• Introduction
• Part I:
  • Lead with Cash: Achieve Great Results by Identifying the Right Target
  • Name the Team “Cash and More Cash”
  • Rationalize Costs Focusing on Cash
  • Make Product Decisions Based on Cash
  • Set Strategy with Cash
  • Change the Culture to One Based on Cash
  • Designing Cash Flow into Systems
  • Creating Cash with Optimal Pricing Decisions
  • Rethinking Capital Budgeting
  • The Impact of Leverage: Examining Private Equity
• Part II:
  • Cash Flow Basics
  • Working Capital and Cash Flow
  • The Statement of Cash Flows: Six Red Flags
  • Cash Flow Details
• Part III:
  • Reflections from Turnaround and Crisis Managers
  • Biographies of Contributors

Readership: Advanced undergraduates and graduate students in business; business professionals.

1. Introduction

As I write this, the world economy is in the midst of a nearly unprecedented slowdown. Some have called it the Great Recession, while others have more boldly deemed it the 21st-Century Depression. Whatever it is called, the devastation of wealth, emotional well-being, and aggregate national output has been startling. Companies once thought to be giants have failed, such as Lehman Brothers, Bear Stearns, Chrysler, and General Motors. Others such as Merrill Lynch and Wachovia Bank have been absorbed by healthier competitors. AIG, once an insurance behemoth with a trillion dollars in assets, is now operating under government conservatorship. Less well-known victims of the devastation that litter the corporate landscape are equally noteworthy: Circuit City, Extended Stay Hotels, Six Flags, and Trump Entertainment Resorts Inc.

Lead with Cash has been written in the hope that its message can bring better management to other companies, enabling them to avoid failure during good times and bad. The message in Lead with Cash— an onomatopoetic phrase, for the words give the entire meaning—is unique. This book instructs the reader on how to lead a company in a new way: by focusing entirely on cash and cash flow. Ideas presented here are, for the most part, not included in the “normal” lexicon of management tools; no one else preaches the idea that cash is the only metric, and that everything else is secondary.

I have structured the book in a counterintuitive style. There are three parts. Part I describes specific thoughts on how management should be conducted with cash as the focal point. Part II contains chapters that explain what cash flow is, how it is calculated, and alternate definitions of cash flow. Part III contains observations and insights from a group of turnaround and restructuring professionals who have utilized various parts of the Lead with Cash message in their work. Short biographies of each contributor appear at the end of Part III.

Some readers may prefer to start with Part II and then proceed to Part I. I have taken the liberty of creating this unorthodox structure to get the conceptual ideas of Lead with Cash across to readers before the details and minutiae of cash flow chase them away. I think that the ideas in Parts I and III are most important. Readers who learn the essentials of managing with cash by reading Parts I and III but who are not comfortable with accounting aspects of cash flow calculation will gain most of the benefits.

What is important is that all readers learn the message of Lead with Cash, and that all companies begin to manage themselves by considering how every action and every deed affects their cash flow.

PART I

2. Lead with Cash: Achieve
Great Results by Identifying
the Right Target

A man walked into his office one day and found a team of movers carrying out his desk. “Where are you going with that?” he screamed. A tall guy with tattoos and a shaved head smirked at him and replied, “The new owners are auctioning everything off.” “What new owners?” the man asked, “I thought I could work out my company's troubles.”

The fictitious scenario depicted above can befall any business. Today your company is successful. Tomorrow it is gone. Chaotic change is rampant and its effects are pervasive. Few companies fail, but many others undergo rapid sales declines and a loss in profitability. The survivors may eventually perish too unless they learn to manage their business better. Your business is at risk unless you fix it! The furniture movers, in the metaphor above, may not walk out with your company's computers tomorrow, but be assured that your competitors are actively trying to steal your customers today. Management styles from even a few years ago are anachronistic. Today's situation demands a new approach, a more inclusive business model. The task of survival must be transmitted throughout the organization. Everyone must participate if your company is going to survive.

Not long ago, unhealthy companies traveled a longer and safer path. This path had numerous perpendicular branches that led to safety. The course that companies follow today is shorter and more dangerous. An unhealthy company's descent once began by the company getting sick, then consulting a number of different doctors (turnaround agents), and finally with it entering a hospice setting (bankruptcy court). However, things have changed. Sympathetic creditors willing to compromise and forgive are figments of the past. Today's credit adversary is likely to be a hardnosed, Ivy League-trained MBA who carries a BlackBerry and two cell phones and who cares very little about the human cost of corporate death. Lost jobs, ruined communities, and wiped out stockholders matter little to these wizards of Wall Street.

Sudden corporate demise afflicts large and small companies alike. Size alone is not a safety net. Longevity is no defense. When a company finds itself in trouble, it must either quickly find a path to recovery or it will vanish. Living in a fast-paced world has many advantages that improve the way we live, but it also destroys the value of financial relationships and business friendships. You can no longer walk down the street to the local bank and talk with someone who attends your church and lives in your neighborhood. Companies fail today because of what they did yesterday. Creditors are probably investors who bought the loan from a distressed bank or hedge fund and are only interested in making a quick dollar. The number of steps leading up to the guillotine is very small compared to historic times when companies had greater power to renegotiate terms with lenders, who wanted companies to survive so long as they received waiver fees and a small boost in the interest rate they earned.

The key to survival in the new world is to lead with cash flow. Cash flow is the target. Everything a company does should be aimed at improving its cash flow. The first principle in finance, one that every business student learns like a mantra, is that the value of a firm equals the current value of its future cash flows. Cash flow is a company's life blood. Everybody who works in an organization needs to understand what cash flow is and, more importantly, how to manage their part of the business with an eye on cash flow. By making decisions that improve cash flow, you keep your creditors from having anything to say about your company's future. Creditors have never been known for being compassionate, but now they have become downright avaricious. They are as willing to pull the rug out from under a company as they are to put sugar in their coffee. The key to survival is to stay out of the clutches of creditors. Moreover, the key to successful growth, as opposed to growth that actually leads to trouble, is to grow cash flow. Companies and their managers and employees need to learn what cash flow is, and how to manage the organization while making constant reference to how things impact cash flow.

This book teaches both of these goals. It provides a primer on cash flow that virtually every employee can benefit from. Then, it creates the ideology that all companies, but especially those feeling the brunt of a competitor's actions, need to be managed with a constant focus on cash flow. What a crazy juxtaposition! Cash flow management coupled with more productive workers. Cash flow management coupled with more innovation. Cash flow management coupled with happier workers. That is the future envisioned in Lead with Cash.

How come no one ever thought of this before? They have. Many successful companies have been practicing leadership with cash flow. Most of these companies are family-owned businesses for whom cash flow determines whether their kids get braces, whether their spouse gets a new car, and whether the family prospers. The vast majority of companies know what cash flow is and what management is; they just have not learned to put the two concepts together. These companies overlook the benefit of interjecting cash flow throughout the enterprise. Companies actually locate cash flow specialists on one floor and then conduct management activities elsewhere in the building. At the end of the quarter, the cash flow experts figure out whether the company's cash flow has grown or shrunk and then they retreat back into their cash flow hiding place. Other employees may learn about the quarterly cash flow, but they do not think about how their own actions can affect cash flow. This book changes all that. Lead with Cash provides a framework to help companies get off the old way of managing and onto the new wave.

3. Name the Team
“Cash and More Cash”

It is impossible to exaggerate what can be done with focus and concentration. People, organizations, and companies can all achieve great things if they apply a concerted focus to their goals. Look at the remarkable opening ceremony that China presented at the 2008 Summer Olympics featuring 15,000 performers in a four-hour extravaganza. Few will ever forget the spectacle. For centuries, Eastern philosophers and others have taught those wishing to achieve enlightenment how to focus themselves in order to achieve inner harmony. Lead with Cash advocates a similar dialectic for businesses. Companies need to focus their employees on the target. Notice I didn't say “a target” but instead “the target”, by which I mean cash.

Getting Everyone to Focus on Cash

A great day at the office seems to end too soon. You are kept busy doing things you like to do and time just evaporates. Imagine that everyone in your company has a job which fits that description. They come to work, get a lot done, and actually enjoy themselves. Now ask yourself whether those employees, at some point during the day, have thought about maximizing the company's cash flow. The answer is probably not. This tells us two things: (1) cash and cash flow are not uppermost on people's minds, and (2) the way to affect cash flow is by designing jobs so that improvement in cash flow is a natural or automatic outcome of the job.

If a job is well thought out and properly designed, the busy worker in the paragraph above is actually improving the company's cash flow daily as he or she performs his or her tasks. Most workers do not understand their contribution to cash flow. This is true unless managers include cash flow education as part of a regular process of information exchange with their team. This general lack of knowledge raises an intriguing question: should employees be taught about cash flow or can the same goal be accomplished by redesigning jobs so that they “automatically” improve cash flow? The answer to this question is the subject of Lead with Cash. In brief, cash flow should be taught and retaught, but jobs should be designed to emphasize the need to protect and bolster the company's cash flow. Unless everyone focuses on cash flow, it gradually fades into the background and is soon lost amid the noise of daily activity—making sales, buying supplies, hiring workers, etc. When that happens, jobs lose their attachment to cash flow and take on a life and purpose of their own.

Patriotism is a similar phenomenon to focusing on cash flow. Most Americans—as they make their way through school, religious education, and parental guidance—become reasonably patriotic. This patriotism comes out when the national anthem is played, while walking down Constitution Avenue in Washington, D.C., and during times of geopolitical stress. On a daily basis, however, it gets buried beneath concerns about jobs, family, and sports teams. True, the individual is still patriotic, but he or she does not think about it and it does not affect their job, family, or sports team. The difference between patriotism and focusing on corporate cash is that patriotism does little to help most individuals in their job, with their family, and in the sports arena; in contrast, focusing on cash flow actually helps companies. That is why companies are advised to educate their workforce about how strong cash flow increases the company's liquidity, enables new investment in productive facilities, and ultimately, if things go according to plan, may culminate in higher wages or bonuses for all.

Companies can help their employees to think more about cash by following three simple steps. First, they need to insist that managers regularly clarify or decode, for their employees, the relationship between their job and the company's cash flow. Second, they need to regularly report to employees what has happened to corporate cash flow. Finally, they should establish a reward system that benefits the individual worker when cash flow achieves a pre-set goal. The operative words are Clarify, Report, and Reward.Every manager should have a checklist with “clarify, report, and reward” on his or her desk as a constant reminder to keep channeling information to the team.

The first task, clarifying how the job affects corporate cash flow, is the most critical and the most difficult. It is critical because it is the nuts and bolts of the entire “lead with cash” process. If managers fail to translate how each job affects cash flow and how cash flow affects the firm, then the worker will focus on satisfying personal needs and not those of the company. Workers, for example, may be more con...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• 1. Introduction
• Part - I
• Part - II
• Part - III
• Index