Franck Levy has held a number of CFO positions. In terms of scope (site, BU, Group) and sectors (automotive equipment, packaging, steel, etc.). Or in terms of shareholding (listed group, private equity fund, family shareholder, etc.). Today, this BFR enthusiast shares with us a few good recipes for cash management and good inventory management:
Franck, tell us about your experience in cash management and forecasting.
‘I remember a cash flow forecast made on 15 December for 31 December, a figure we knew would be scanned by all our financial partners. On 2 January, the real figures came in, and we had ended the year several million euros ahead of the forecast. Everyone was happy, but I wasn't, because the difference with the forecast was so great.
We had an apparently extremely robust system (weekly forecasts for the next 23 weeks, complex tables, disciplined teams, etc.) but with a 2-week horizon. Our system was as precise as a backhoe in reverse.
Understanding the origin of the problem
‘I then realised that historically the pressure to keep to the cash flow forecast was so great that everyone had got into the habit of being extremely conservative. In the end, we lowered the bar to make sure we passed it. We had a good tool, but we used it badly, because our mindset was guided by fear rather than the quest for performance. Nor was there a management system to understand and deal with the causes of deviations and reduce them over time.
We discussed this point with the teams, and without hesitation, we decided to shorten the time horizon. Let's try to be precise at 1 month 2 months 3 months, and we'll look at the 6 months later. We have also set up monthly meetings - including the site CEOs - to understand the causes of variances and to deal with them. And finally, we have replaced fear and guilt with a focus on performance and continuous improvement. It's not having a variance with the forecast that's to blame, it's not trying to understand why we have a variance.
Very quickly, our accuracy improved, backed up by KPIs. The teams understood that cash flow forecasting was first and foremost a management issue, rather than a question of figures. ’
What events have marked your career in terms of working capital requirements?
‘I became interested in WCR around fifteen years ago. At the time, I thought that WCR was a purely financial issue. I was quite naive! I began to understand that it was something else when I was asked to create the Credit Management function at Albéa. We'd just had a major non-payment and we wanted to improve quickly.
In the space of a year, we turned the situation around by reducing the ratio of late payments to customer balances from 25% to 5%. The improvement was substantial, amounting to around €25m, and all the sites (around thirty) had made progress. ’
Deployment of Credit Management at Albéa
‘To achieve this, in a few words, the project was deployed according to what we called the ‘Mickey Mouse ears’ principle: tools, management system, state of mind. Three elements that can be represented on a diagram in the shape of the head of the famous Disney mouse. Everyone had a role, from the CEO, who carried the project's banner, to the client accountants, who were in charge of the relaunch. But there was also the workforce, in particular the sales and finance teams, whose interests we had aligned. In fact, one of the key factors in our success was to deal with the concerns of the sales people from the outset, some of whom thought that if we put too much pressure on customers, we would end up losing them.
The Sales Director played an important and beneficial role in addressing these concerns, and the virtues of Kaizen did the rest.’
The role of management
‘If I do the maths afterwards, we had to run over 600 meetings in a year. If you add the training seminars on recovery techniques, the external benchmarks, the psychological unlocking and the involvement of all the top management, you can understand why I'm talking about a strong managerial dimension. It became clear to me that cash management was above all about people management!
It was a turning point for me, but perhaps also for the Group, because a year later we were bought by Sun Capital Partners, a private equity fund, and the maturity we had acquired in managing outstanding receivables helped us to tackle outstanding payables and inventories. ’
Same project, different target: buyers
‘This was a second turning point. Initially supported by consultants, we ended up deploying the same type of system as that put in place for our customers. This time with the buyers (supplier side) and the logisticians (for stocks). Once again, this was a corporate project. All functions were involved, and once again, top management was on board. After the consultants left, we continued to improve our tools, setting up a module with the support of the Continuous Improvement teams.
To cut a long story short, in 2 years under iso conditions, inventories were reduced by €10m and trade payables increased by €15m. If we add the improvement in trade receivables that we had achieved just before, the WCR counter had fallen by €50m. That's 30% in three years. It was a great team success!’
Is inventory management more difficult than tackling outstanding receivables and payables?
‘Yes, of the three, it's the most complicated to deal with.
That's why, ideally, it shouldn't be managed with a view to reducing WCR, but with a view to cleaning up the company. Let me explain: the slightest weakness in the business model or in management, such as an imprecise strategy for a segment, a weak commercial offer or unsuitable procedures, generally results in additional stock. The good news is that, by taking a close look at inventory, there's a good chance that we'll be able to identify important areas for improvement in the business. The CEO of a company finally has the opportunity, through an inventory optimisation and management project, to significantly improve his business.
Here again, I often use the image of dieting. You can lose a few kilos quickly, it's quite easy if you're careful for a while, but we all know that the hardest thing is to keep the kilos off. Reducing stocks is a bit like that; tackling stocks is first and foremost a way of improving a company's efficiency. It also generates cash flow. That's the way to look at it. ’
What would be one of the first things to look at if you wanted to tackle the subject of stock management?
‘Probably look at stock references through a double prism: in terms of value (in descending order) and in terms of coverage. In other words, how long on average a reference remains in your stocks. Combining the two approaches will enable you to identify the first targets, and define the Pareto heads.
If you're planning to tackle your stocks, I'd advise you to bear in mind the notion of coverage, and therefore time. It is less intuitive than the notion of quantity.
People often think that if they have too much stock, it's because they've bought or manufactured too much. But most of the time, they haven't bought or made too many products, they've just bought or made them too soon.
To put it another way, to halve your stocks, for example, all you have to do is keep your products in stock for half the time. So they turn over faster. It's basic, but less intuitive.’
You often talk about Kaizen and continuous improvement. What is the link with working capital requirements?
Kaizen’, literally “change for the better” in Japanese, translates as continuous improvement. They are very common in factories, but they are often insufficiently applied by support functions and functions not directly linked to production. I'm talking about the Finance, HR, Sales and Purchasing communities.
You've just tuned me in to a subject that's close to my heart, so I'm going to force myself to be brief. In a nutshell, the world of Kaizen is full of useful tools and methodologies for anyone wishing to launch a project to reduce WCR.’
Example of the Kaizen method
‘A simple example: I've often been struck by the number of actions that weren't checked to ensure that they actually dealt with the identified problem. Apply a wheel logic from time to time « PDCA » (Plan, Do, Check, Act), or Deming's wheel, is really useful. In concrete terms, you define an action (‘Plan’), put it in place (‘Do’), check that the action has dealt with the problem identified (‘Check’). And if it hasn't, we rectify the situation (‘Act’). This phenomenon repeats itself endlessly, which is why it's known as the PDCA ‘wheel’. That's just one example, and there could be a thousand more in the world of Kaizen’.
Is the strategy different in a context of tighter cash flow?
‘10 years ago, I would probably have told you that cash flow is tight. You have to pay even more attention to WCR and do even more to reduce it.
Today, if your cash flow is tight, the first thing I would say to you is to be careful. It could be the result of an unsuitable business model, a weakness vis-à-vis your competitors, and therefore a latent state of fragility... Lthe problem is that attacking a project to reduce WCR can be the final blow and finish you off. So you need to think carefully before launching a BFR project. I can use an image here too. You don't ask someone who is very ill to go on a diet and go to the gym. First of all, they need to regain their strength, and even their body fat. Then, when the person has recovered, yes, they can go to the gym.’
To sum up, what do you think are the most important points for improving cash management? What role does management play in WCR reduction projects?
‘I'd like to come back to the Mickey Mouse ears I mentioned earlier. There are three essential things:
- A outil adapted to the company's needs.
- A management system who can guide financial and non-financial staff in the use of the tool and the search for performance.
- And a good ’ mindset ‘In other words, it is essential that the teams are ready for the changes that will have to be made. To do this, you need to create buy-in. To create buy-in, you need to get the players involved. All the players.
However, it has to be admitted that very often, WCR reduction projects are initiated and steered by financiers, who are primarily focused on the tool."
The role of financial tools
"The best Excel spreadsheet in the world, on its own, won't give you much in the way of accurate cash flow forecasts or reduced WCR; above all, you need to manage people, which means that WCR reduction projects are as much HR issues as they are financial ones. In the end, perhaps the first reflex of a CFO with a WCR project to deal with would be to go and see his HR manager and suggest that we work together. I know there are trophies for the best CFO-HRD team, I don't know if there's a trophy for the best CFO-HRD team, but it would make sense. "
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