The buffer, safety and anti-ulcer effect of great cash generation are sometimes tarnished as a Lazy Balance Sheet says management strategist Mario Pretorius. Cash is his mantra – and not generating enough of it can “whip the noose around the neck in a single accounting period,” he warns in his latest tip in the Unconventional CEO series. GK
Cash! Cash! Cash!
IN B-school the mantra of gearing is preached as if the world is linear and an accountant’s paradise. A great many CEO’s shot up through the financial chute. Many of them are financial engineers that love to apply money while weaving and bobbing through an uncertain world, a fast-changing industry, and an uncertain response from suppliers, customers and competition.
My mantra is cash. I like to end up with enough cash to maintain quarterly dividends at 8% yield, 3 months’ worth of turnover in cash, and the future well financed in terms of expansion by product development or market share expansion.
It also meant that the enterprise could have grown faster. My response is ‘maybe’. It may look like going to the beach with inflatables, a ducky tube and diving gear, but the reality is that the shark nets are built, lifeguards paid and now we can swim with the dolphins at speed.
The buffer, safety and anti-ulcer effect of great cash generation are sometimes tarnished as a Lazy Balance Sheet. Tell that to Apple, Google and then again to GM and Ford. Two crawled for bailouts; two understood the world.
Cash generation is a product of margin, cost containment and great debtor days. Secondary are great creditor relations, and complete focus by all your staff to fast execution of delivery, as every day lost means cash lost. And so on – it’s not a new principle, but one that is so often lost at a crucial point and which can whip the noose around the neck in a single accounting period.
Best to have an ongoing loose scrum with your shareholders for the return of cash than a terse meeting with reluctant and recalcitrant bankers whose priorities remain inscrutable and hostile at best.
All else is promises, dreams, delusions of near cash. Cash is a priority – not finance, not promises, not buffer stock nor other safety mechanisms.
This tip is an extract from the manuscript of “The Unconventional CEO: Common sense outside of conventional Management thinking” (by Mario Pretorius).
