Introduction

Smartly dressed in a blue suit, white shirt, and a pocket square, matching his brilliant red tie, Lee Iacocca strode confidently into a House committee room to formally ask Congress for a bailout of the Chrysler Corporation. It was September 1979, and Iacocca, the newly installed chairman of Chrysler, was nearly as famous as the company he had started leading.

Chrysler was the 10th largest company in the United States, but the third of the big three automakers. It had a storied past filled with great innovations in engineering and design such as antilock brakes, key-start ignition, cruise control, and, perhaps most important, cup holders. But the 1960s and 1970s were hard on Chrysler. Attempts to expand globally coupled with several product failures left Chrysler very vulnerable going into the 1980s. The company did not have a balance sheet strong enough to weather three recessions, two oil crises, new environmental regulations, and soaring inflation. Chrysler simply did not have enough cash.

The seemingly simple concept of managing positive cash flow, on the balance sheet, trips up so many businesses. You must have enough cash on hand to pay your bills, invest in research, develop new products, build efficient plants and so on. Those with strong balance sheets are resilient and can take advantage of growth opportunities. Those who are too leveraged-too much debt and too little cash-are vulnerable any time the economy shifts. Despite its illustrious history, Chrysler could not keep up and needed a lifeline from the government.

There are many factors that go into making a business successful. Having products people want to buy, beating competition on price, and employing a talented and efficient labor force are critical. And there are often factors out of management's control. Inflation, increasing interest rates, supply chain disruptions, and geopolitical crises can make or break many businesses. As I write this book in 2023, the global economy has suffered one shock after another beyond any one company's control.

The COVID-19 pandemic has altered permanently how businesses operate. It laid bare the simple fact that the global supply chain is highly entangled. In 2020, consumer preferences shifted overnight, and even strong, resilient companies scrambled to keep up. This story continues to play out, and I'd argue that the norm for the next five-plus years is one of rapidly shifting supply-and-demand dynamics. Even things like our collective approach to global warming will create a high degree of volatility.

There are many things businesses must do to meet these challenges, but one factor is, without question, absolutely critical. Companies must have access to cash to address volatility.

I coauthored a study at Ernst & Young in 2022 that demonstrates a strong correlation between effective cash management and resiliency. We reviewed 5,000 global companies and evaluated how well they manage working capital. The upper half of those companies are 20+% more effective at limiting the initial shocks of market downturns. Further, weaker performing peers in the bottom half spend on average 26% more time after economic downturns lagging peers in terms of shareholder return. It takes cash to address market shocks.

When global supply chains collapsed at the onset of the pandemic, companies scrambled to adjust, investing heavily to secure materials and paying far more for logistics. Some used debt to fund their capital requirements. This worked as long as interest rates were low and the cost of debt was cheap. But, as the economy heated up and inflationary concerns were addressed through rising interest rates, the debt strategy became unsustainable. Organizations that entered this period with effective cash management discipline not only were better able to respond to market shocks but also they used their strong balance sheets to win market share from weaker rivals.

The market is never constant. There are always ups and downs. Smart leaders recognize this and are focused on cash management at all times. I describe this as having a cash culture. A company with a cash culture understands it is not just about revenue growth but also about cash generation. This is not as easy as it sounds.

Most businesses are built on a profit-and-loss (P&L) culture where sales rule. But things can get out of control very fast. For example, salespeople can agree to all sorts of terms and conditions. You won a big deal but can't get paid for 120 days. Purchasing can chase the lowest cost for material but in doing so agree to large quantities with long lead times. Manufacturing can operate plants most efficiently through long run cycles-running equipment at capacity-but your investment in inventory balloons. There are many examples of trade-offs management needs to make to keep equilibrium between the P&L and the balance sheet. Unfortunately, many of the decision rights for those trade-offs are scattered about the organization and are being made by individuals without insight into downstream effects.

Companies that truly have a cash culture ensure that people have the right tools and training to make good decisions. They promote processes and policies that improve cash generation. And they align incentives and metrics to ensure compliance and sustainability.

Trade working capital accounts for the biggest component of operational cash flow. What is trade working capital? Simply put, it's current assets and current liabilities that are directly associated with operations. Current assets include inventory and accounts receivable, and current liabilities include accounts payable. A business buys materials, investing in inventory and creating products. The products are then sold to customers, and the amounts customers owe are referred to as accounts receivable. Conversely, the company will need to pay suppliers for the materials they buy, which is called accounts payable. Timing is at the heart of effective working capital management.

I'd like to align what I owe my suppliers with how I get paid from my customers and hope to hold only the inventory that I can quickly sell. The more inventory I start to hold, the more cash I tie up in my business. The longer it takes my customers to pay me, again, the more cash I tie up. And, if I must pay my vendors quickly for the materials I buy, I am making big cash outlays often in advance of when my customers will pay me. Let's say that my customers take four months to pay me and that it will take me six months to sell off all the inventory I bought, but the guys I owe money to are knocking on the door and they want to get paid . now. Depending on who these guys are, I might be in a real jam. The timing of when I must pay for stuff and when I get paid for my products or services is what makes or breaks my cash flow.

Okay. It's super-easy. Pay people slower, don't hold on to more inventory than I need, and get people to pay me faster. End of story-no need for this book!

Perhaps I'm a self-interested author, but it's not that easy. Businesses are complex entities. Markets are constantly changing. Decisions that make sense one day might be disturbing the next day. And, as I said, there is often a bias to chasing sales growth without much attention to that pesky art of timing.

This book is not a textbook.

Rest assured, there will be no fancy graphs or complicated equations. Instead, we'll look at what really drives cash through the lens of a fictious company, Owens Electrical. We'll meet the president, Bob, as well as run-of-the-mill employees who deal with everyday, real-life decisions. Sometimes they make good decisions, other times not so good. Through this story I hope that you come away with an appreciation for the importance of effectively managing working capital and operating cash flow.

In Chapter 1, we will look at how Owens is managing the money people owe them. This will be referred to as order-to-cash (OTC). These are the steps taken from the time an order is received through to getting the cash in hand. It includes activities such as order entry, billing, and collections. But, because things rarely go as planned, our team at Owens will need to straighten out mistakes they make that cause their customers to hold back payments.

Next, in Chapter 2, we will focus on how Owens is buying things from others. This is called procure-to-pay (PTP). It turns out there will be a lot of room for improvement from our team at Owens on this front. Then we start to look at where the big bucks are: inventory.

Inventory management is complicated and trips up even the best companies. You can earn bachelor's degrees, master's degrees, and PhDs studying this topic. Chapters 3 through 6 examine some drivers and best practices. Fear not, we'll keep it at a high-enough level to explore the concepts without (I hope) putting you to sleep.

Once we've covered the basics of working capital management, we will then consider what we should measure. I'll say it here and then again in Chapter 7: "What's measured improves." Another, far more famous Peter wrote that-Mr. Peter Drucker. I agree completely. But metrics can be tricky. If we measure too few things, we might not get the outcomes we desire. But, if we overload the organization with too many metrics, we might confuse everyone and get similarly dismal outcomes. The key...