A CFO’s Guide to Cash Flow Management and Business Financial Discipline

Several businesses have the potential to grow and succeed by innovating within their industry, offering high-quality products and services, or beating the competition with attractive pricing and discounts. 

Many of those same businesses may falter, however, due to poor management of their finances. 29% of surveyed startups say that running out of money was a reason for the business’s failure, according to “The Top 20 Reasons Startups Fail” report published by business analytics platform CB Insights.

The report also notes that other factors, such as market-product fit and lack of funding, contribute to businesses depleting their cash.

Pankaj Thakkar, chief financial officer (CFO) of L'Oréal Philippines, says that a business and its people must have this one value to succeed: discipline. He explains in an April 16 interview with The Business Manual that sales success may be futile when leaders fail to manage their finances well.

“When you want to grow in the business without discipline, it will be fragile. If you don't have control over the cash, if you don't have control over the profit, you show growth, but in the end, nothing is coming." 

Thakkar, whose experience in finance and accounting spans almost 20 years, spoke on the business money practices he employs to keep his companies’ balance sheets sound for the long term.

Cash flow is a consideration every person in a business should keep in mind.

“‘We always run one quote in finance: revenue is sanity, profit is vanity, and cash is reality.’ So if you don't have cash, you are gone.”

Thakkar says a company’s sales and KPI (key performance indicators) achievements can be futile when it fails to keep track of its cash flow, specifically the collection of its receivables. Not being able to manage cash flow may prevent a company from paying expenses on time or investing in projects and growth opportunities.

"We always say to the team that your job is not complete when the sales happen. Your job is complete when you recover the money on a timely basis from the customer.”

The CFO suggests conducting proper and accurate forecasting of their cash flow, an idea he emphasizes to his teams in company town hall meets and conversations with managers.

“Forecast accuracy is the most important,” Thakkar said. “Because if you don't do forecast accuracy properly–the sales team is saying something to you, the operations team is buying something else, and in the end, you have a higher level of inventory–you’ve already gone because you are blocking the working capital.”

To achieve accurate forecasts, Thakkar and his teams review their receivables and cash flow targets on a monthly basis. This practice allows the team to determine how they allocate financial resources.

For instance: he makes it clear to his team that if they are not able to reach targets, he will not allow more funding into capital expenditure (capex), which is the money a company uses to purchase new assets or invest into initiatives like product development.

Thakkar holds one principle on cost management: spend money wisely, not blindly.

He shared that although cost-cutting measures like hiring freezes and limiting capex can boost quarterly results in the short term, those same measures may inhibit the company’s long-term growth.

“We spend the money, but every peso has to matter,” said Thakkar. “For example: I spend a hundred, so I need to get money out of it. I will not stop the spending of money, but it has to be return-oriented or ROI [return-on-investment]-oriented.”