Five rules to control cash flow - financial turnaround in the NHS
06 November 2017
Leadership teams are regularly telling us that cash has become an area of increased scrutiny by regulators. More and more NHS organisations are facing cash pressure, as financial constraints, increasing demand and funding restrictions continue and grow. Only last week we saw how a cash crisis in a hospital trust can lead to emergency funds being needed at short notice.
Recognition of the importance of cash is not new, with ‘cash is king’ and ‘cash is the lifeblood’ being two commonly heard assertions; however, this feels particularly relevant now in the NHS because of the changing situation trusts and teams are facing. There is plenty of opportunity to improve the cash and working capital positions of most organisations, and in turn reduce the cost of borrowing. Organisations must, however, plan, focus on and manage cash and working capital appropriately. Advanced planning ensures they are well prepared for challenges that inevitably arise further down the line.
We’ve worked with some of the largest and most financially challenged organisations in the country - both private and public sector. We’ve helped them to develop techniques to manage and plan their cash flow, and also to optimise cash and working capital to reduce unnecessary short and medium term borrowing. The feedback we have had has been very positive.
Based on our experience, and conversations with our clients, we’ve developed five key rules which we believe are essential for organisations looking to get better control of their cash:
- Clear ownership and communication through management prioritisation and focus on cash across the organisation, leading to a cultural shift. In our experience, a focus on cash often translates into an increased grip on financial improvement plans due to a clear understanding of how cash works.
- Accurate forecasting over 13 weeks, and linked to the medium term, through robust methodology, a logical framework and granularity of underlying assumptions, cash-related targets and reporting.
- A clear view on risks and pinch points, as well as timing of these to allow mitigation.
- Structured cash management - harnessing an understanding of the sources of cash in the organisation, and linked to a range of tactical cash and working capital management levers to improve the position, culminating in sustainable improvement.
- Having the tools to forecast and manage cash properly, through time invested in training, systems and information availability.
The benefits are clear:
− Improved cash generation – a robust forecast provides the foundation upon which cash and working capital improvement initiatives can be built and sustained, which will create cash with no additional funding cost.
− More informed decision-making - increased confidence for making short-term tactical business decisions (e.g. stretch credit terms, reduce capital expenditure).
− Improved visibility - a timely and accurate cash flow forecast gives clarity on pinch points and headroom.
− Increased accuracy – a reduction in variances to acceptable tolerances provides confidence and reassurance to key stakeholders that you are in control, as well as providing greater confidence in the level of drawdowns if and when required.
− Cultural change – a disciplined approach to cash forecasting reinforces accountability at all levels throughout the organisation and improves communication across functions (e.g. the centre and divisions).
− Process improvements and control mechanism – a focused approach will highlight areas of the business where processes need to be improved, both financially and operationally.
For more information on our approach see The road to recovery: delivering financial sustainability in the NHS