Written by Neil Robertson, Compleat Software: As all qualified accountants know from day one of their training, the financial cup is always half empty. Whilst optimism and enthusiasm have their place elsewhere in the business, the reality of cash flow and running payroll, paying critical suppliers, VAT and PAYE/NI are the hard realities that keep each business in business.
For CFOs, cash flow is and will always be king. The question becomes how much of a cash flow buffer is required to keep the business safe? This is the available funds that are ringfenced against that rainy day (month or quarter) when the sales director’s optimism and enthusiasm in the sales pipeline was misplaced, a “disaster” occurs that requires unexpected cash to resolve, or a new initiative or project takes longer and more cash than anticipated. What if they all happened at once?
And then there are the storm clouds of Brexit and the direction of government on the horizon, heralding yet more uncertainty in the future and raising the question of whether the current cash reserves are sufficient?
Given the cup is always half empty, expediency says increase the reserves, put off recruitment, don’t replace aging equipment and technologies, stop investing in the future because if you get it wrong, there will not be one, only the ignominy of a failed business on your CV.
So how much cash buffer is enough to protect against the risk of failure and perhaps as important, what is the damage to the business (and the country) if the majority of CFOs view of what delivers “cash flow buffer comfort” is over cautious?
Productivity in the UK fell for the second quarter in a row (Office for National Statistics August 2017) predominately driven by the continuing failure of UK businesses to invest in the future. The productivity gap between the UK and our “competitors” in the global market is significant – 35% below Germany and 30% behind the USA and more worrying, the gap is growing as we fall further and further behind.
Whatever you view on the wisdom of Brexit, the ability of UK businesses to compete on the world stage has never been more important and frankly, we are already far from the ideal place to do so.
Whilst CFOs must make the hard choices to reflect their personal view of “cash flow comfort”, if their competitors have a more aggressive investment strategy, the longer-term outlook of survival is equally jeopardised as their business simply becomes increasingly uncompetitive.
Driving productivity growth should be at the top of the list our corporate priorities. The ability to do more with the resources we already have, or in some cases, doing the same with less resources, is simply a hard fact of life in the fight for both survival and growth, however, unpalatable some of those decisions may be.
For most CFOs, huge productivity gains sit right outside their office, drowning in the piles of paper, countless spreadsheets and endless unnecessary repetitive tasks that can be fully automated, simply to deliver the information to decide their cash flow buffer requirements.
For the rest of the business, the total lack of investment to increase productivity in the finance function gives little comfort in the capabilities of the CFO to make the right decision on investment priorities elsewhere.
The philosophy of “it works well enough so why change” may protect the cashflow buffer, but the reality is an over conservative CFO is as dangerous to the business as well funded competitor – or their more aggressively minded CFO.
Every CFO sits somewhere along the “cash flow buffer” spectrum. The point of this message is that an overly cautious CFO is as dangerous to the business as their overly aggressive counterpart.
Given the dismal UK productivity performance, it is easy to draw the conclusion that too many UK CFOs are under investing compared to their global competitors.
Unless this changes, these CFOs are contributing to the self-fulfilling prophecy of declining business performance that in turn “justifies” the growing value of their cash flow buffer to keep the business afloat, but the long term outcome is equally inevitable.
By under investing, the overly cautious CFOs are making their business ever more vulnerable to their more aggressive peer group and the increasing productive and competitive businesses they manage.
Written by Neil Robertson, CEO of Compleat Software. Exhibiting on stand 72 at Accountex Summit North 2018.