• Posted on: June 28, 2013 by: CashPerform

     

    Strategy literature omits the crucial financial constraint that can be regarded as the cost of equity capital and incorporate it within its cash conversion cycle, which then enables a company to remain viable.

    A good strategy should capture enough of the value created so that it can compensate shareholders in excess of the firm’s cost of equity capital.

    Accounting profits are not economic profits because GAAP doesn’t allow for a capital charge on the P&L.

    That is why a good strategy must clear the financial hurdle created by its cost of equity capital. Otherwise, it’s in a slow state of economic liquidation.. .and probably doesn’t even know it.

    Posted on: June 20, 2013 by: CashPerform

    I attended a meeting yesterday at the Houses of Parliament not only to hear about Michael Fallon’s MP view as minister of state for Business and Enterprise but also to hear the views of 60 delegates representing approx. 200K SME’s across the country and I summarise the main points:

    A) The need for alternative financing to commercial (retail) bank lending to SME’s and the Business Bank was mentioned but as I say just mentioned.Handelsbanken was held out as good example of ‘personalised/community’ driven lending….no reasons as to why were given…..but personally speaking speed is part of the equation.

    B) The threat to SME’s was seen as coming from more reporting/bureaucracy-red tape and yet audit limits, submissions to company’s house have all been revised in favour of SME’s and some say that this has resulted in even more failures as not spotting problems (especially in cash flow) earlier enough.

    C) Late Payment–confusion reigned as to how to put this into practice let alone law, Reporting CEO’s on the web site was Mr Fallon’s view. Personally I see this as just bureaucracy gone mad. Contracts exist and the law can be enforced…..its a matter of judgement for any ‘going concern’.

    D) E-invoicing is seriously being considered by HM Government for all departments and they want Public authorities from police to Local Councils to follow their lead.My view is that Mexico and Brazil have tried and Italy have started the process of adoption and with SEPA (Single European Payments Area) stumbling (Germany saying its too fast – its due for roll-out Feb 2014) its a big ask…but potentially could help SME’s in both cash flow and reporting/bureaucracy reduction.

    E) Current and New funding streams to be streamlined (number and complexity) with focus on Horizon 2020 scheme from 2014 to 2020. Details remained sketchy but focused on 19-24 year olds and apprenticeship schemes so critical to SME’s.

    Posted on: June 13, 2013 by: CashPerform

    The challenge in any organisation is to understand how cash will be impacted by an employees, suppliers, customers or even investors actions. Recent advances in mobile technology now allows one to ‘map’ a process and in the cash sphere one should be able to deliver this to ‘internal’ people so that a decision can be made as to whether this will impact strategy.

    For instance. A commercial/sales person could be on the verge of winning a contract, or a project manager could be about to incur a variation order for extra costs but both need ‘approval’ that cash is going to flow ‘diferrently’ to the norm ie to the original contract.An app or apification of the cash process could manage any issues about whether the strategy would be acceptable.Strategy here is at the coal face, not in the board room, but it meets the organisations overall strategy if approved.

    Return on Capital Employed (ROCE) has at its heart, working capital, as is part of the equation PBIT divided by  total assets less current liabilities. Therefore when credit organisations use ROCE they are in effect measuring the efficiency of working capital to generate cash to pay for such investments as equipment, land, factories and fund the operational areas of debtors and creditors.

    It is critical for all organisations to demonstrate a consistent and robust measure of ROCE over say a 3 year period to provide evidence that their management of cash is such that investors are confident that the return OF their cash is not in doubt, and that the return ON their investment absorbs the ‘risk’ of moving cash from no or low risk areas/accounts.