Cash Flow Management in Projects: The Importance of Cash Flows in a Company

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Cash Flow Management in Projects: The Importance of Cash Flows in a Company

Cash Flow Management

Welcome to the Corporate Treasury 101. In this article, we have a treat for you as we bring together all the valuable insights from our previous discussions with Daniel Sanchez, an esteemed engineering director at one of the world’s largest Fast-Moving Consumer Goods (FMCG) companies. Prepare for a comprehensive masterclass on project financing, cash flow forecasting, payment terms, and the importance of cash flow productivity.

Have you ever wondered how project financing works and how it impacts your company’s cash flow? Or perhaps you’re seeking a deeper understanding of cash flow forecasting, particularly in capital expenditure (CAPEX) projects. Well, you’ve come to the right place. Throughout this episode, we’ll dive into these topics and more, demystifying the complexities of treasury management in large organizations.

In this article, you will learn:

  • The Secrets of project financing and How to navigate cash flow forecasting in CAPEX
  • How to strategically leverage payment terms and conditions to manage your company’s cash flows effectively
  • The importance of cash flow productivity and how it impacts your organization’s financial health
  • Practical takeaways and actionable steps to enhance your treasury management skills
  • Insights from an experienced engineering director at a leading FMCG company
  • Expert tips for achieving financial success and optimizing your cash flow management strategies
  • And much more

Now, without further ado, let’s delve into the world of treasury management and uncover the strategies and techniques that will empower you to navigate the complex financial landscape with confidence and expertise.

Table of Contents

Who is Daniel Sanchez, and What Does He Do in His FMCG Company?

Daniel Sanchez is an experienced professional engineering director in a leading Fast-Moving Consumer Goods (FMCG) company. His multi-faceted role focuses on product delivery, strategic planning, and disruptive innovation.

His Role and Responsibilities

Primarily, Daniel works on launching new products and equipment into the market. This means dealing with everything from small projects to multi-million-dollar ventures and managing the development and production of products from conception to delivery.

Apart from that, his role also entails strategic planning. Working closely with the business, he outlines a long-term framework to deliver innovative products most cost-effectively. This strategic planning aims to maximize profitability by minimizing investment and production costs.

Finally, Daniel explores disruptive innovation. This part of his work involves scrutinizing future technologies for their intrinsic value and how they can contribute to better product delivery and company performance.

This innovation isn’t solely focused on the end product but on how it’s manufactured, maintained, and grown. This aspect of Daniel’s role is about improving efficiency and driving the constant pursuit of productivity.

How Daniel Sanchez’s Role Interacts with Corporate Treasury

Despite being an engineering director, Daniel also has a considerable stake in his company’s financial matters. He’s involved in injects, which are essentially the company’s investments. He manages the capital cash flow, deals with supplier payments, and handles capital expenses.

How He Utilizes Financial Metrics

Two primary financial metrics guide his work: Net Present Value (NPV) and Rate of Return (ROR).

  • Net Present Value (NPV): This metric helps understand a project’s value over its lifetime. It is calculated by taking the project’s expected cash inflows (revenue) and outflows (expenses, capital investment, depreciation, etc.) over its lifetime and discounting them to their value in today’s dollars. A positive NPV suggests a profitable project, while a negative NPV indicates a potential loss.
  • Rate of Return (ROR): This metric shows how fast the company will recoup the money invested in a project. It indicates the profit or loss of an investment relative to the amount invested, typically represented as a percentage.

For a project to be worthwhile, ideally, it should have both a positive NPV and a reasonable ROR. While a high NPV is attractive, if the ROR is too low (meaning the company wouldn’t recoup its investment promptly), it may not be viable unless strategic considerations are involved.

Finding the balance between these two metrics is crucial in decision-making. It ensures that the company’s investment strategy aligns with short-term and long-term goals, thus driving the business forward while maintaining financial stability.

What is the Expected Rate of Return and Weighted Average Cost of Capital in the FMCG Industry?

As an FMCG professional, Daniel Sanchez explains the expectations around the rate of return and the concept of the industry’s weighted average cost of capital (WACC).

Different Categories of Projects

The expected rate of return varies depending on the category of the project. If a project is intended to significantly impact productivity in the current year or the next couple of years, a high rate of return is desirable. The higher the rate of return, the more likely the project will be selected for investment.

For strategic projects, however, the figures can change. Sanchez has worked with numbers aiming for a 15 per cent return or above. These are strategic projects at large, well-established companies. In these cases, the goal is to keep the company’s momentum moving in the right direction.

Understanding the Time Value of Money

Here’s where we dive into Net Present Value (NPV) again. Guillaume reminds us that this metric isn’t simply about deducting the cost from the profits. The time value of money is a crucial factor to consider.

The time value of money recognizes that money today is worth more than the same amount in the future. This is due to its potential earning capacity, meaning the money you have now could be invested to generate more money in the future.

So, let’s say you plan to spend a million dollars every year on a project. The million dollars you will spend in the third year is worth more now than in three years. You might prefer to have that million dollars right now to invest in something that offers a higher return.

This concept is the reason behind the discounting process in NPV calculations. It’s not just about money in and money out. It’s about the discounted value of money over time.

So, as you’re considering any project or investment, always bear in mind the time value of money. In short, don’t just look at how much money a project will cost or generate, but also when those costs and revenues will occur. Always strive to maximize the value of your capital today, whether investing it in a promising project or saving it for a more profitable opportunity in the future.

How do FMCG Companies Fund their Projects?

Guillaume, delves into how FMCG (Fast-Moving Consumer Goods) companies fund their projects, particularly engineering projects. He quizzes Daniel Sanchez on the specifics of this process.

Funding for Capital Projects

In the FMCG sector, most companies fund their projects independently. But what does that mean, you ask? These companies typically use their yearly cash flow to fund their capital investments.

Capital projects refer to major investments like building a new factory, starting a new product line, or implementing new technology. The funding for these projects often comes from the company’s income in the previous year or the current year.

In other words, these large FMCG companies can cover the costs of their global projects using the money they generate from their operations. Pretty neat, right?

Funding in Smaller Companies

But here’s a twist: things work differently for smaller companies or startups. They don’t usually have big cash reserves or high-income levels like the larger FMCG companies. Sometimes, they might not even have cash flow at all.

So, how do they manage to fund their projects? They typically opt to issue debt or equity. These are the two main financial tools smaller companies use to fund their operations or projects.

The Importance of Consistency

Now, let’s get back to larger FMCG companies. Something very important for these companies is consistency. When outsiders look at these companies, they want consistent cash flow. They want to see the company investing in its operations and not taking on too much debt. This consistency is part of what makes a company attractive to investors and helps it maintain its momentum.

To sum it up, the best way for an established FMCG company to keep its momentum is to generate sufficient cash flow to fund its ongoing operations and future growth. This is why managing your company’s cash flow effectively is crucial. So, put on your thinking cap to find ways to ensure your company’s cash flow remains healthy and consistent. Your future growth depends on it!

How Does Engineering Play a Role in Project Funding?

In this segment, Guillaume asks about engineering’s involvement in funding FMCG projects. Daniel Sanchez provides insightful information on how engineering contributes to the early stages of a project and its ongoing management.

Early Involvement of Engineering in Projects

Right off the bat, the engineering team gets involved in the early phases of a project. This happens after initial market research shows promising potential for the new product. At this stage, the engineering team has a critical role to play.

The team starts by understanding the resources required to bring the project to life. This includes evaluating the necessary technology, the size of the production facility, and the optimal location for production. These inputs then help calculate the capital investment required for the project.

The engineering team’s calculations during the early feasibility and definition stages provide an important range for two key metrics. First, they help determine the net present value of the project, as the capital investment will significantly impact the project’s balance for the first one or two years. Second, these figures will affect the rate of return on the project.

The Engineering Team’s Role in Project Delivery

If the project continues to show promise and passes the financial hurdles, the engineering team’s role shifts towards project delivery. They move from providing an investment range to specifying the technology needed and estimating its cost. The team also considers logistics like purchasing, shipping, and setting up the technology.

Remember, it’s not just about the equipment! The engineering team also considers related expenses like facilities, land, and other factors. They prepare a detailed budget estimate, the final figure needed to confirm the project’s viability. Whether to move forward with the project is based on this budget.

Engineering’s Role During Project Execution

Once the project gets the green light, the engineering team’s role doesn’t end there. During the execution phase, they must constantly monitor the project to ensure it remains within budget. If the project spans several months or even years, understanding how spending flows over this time is vital. The money spent on the project is effectively being taken from the company’s pocket, so they need to know what expenses they can anticipate throughout the project’s duration.

In a nutshell, the engineering team plays a critical role from conception to completion. They provide valuable input during the early feasibility stages, help deliver a detailed project budget, and continuously manage the project’s financial health during execution. So, as a treasury professional, it’s crucial to maintain a good relationship with your engineering team, as they could significantly influence your project’s success.

What Is Capital Expenditure and Its Impact On The Company’s Balance Sheet In Project Management?

In this section, Hussam delves into how project management, particularly in engineering, intersects with treasury operations, especially concerning capital expenditure and its impact on the company’s balance sheet. The guest, Daniel Sanchez, elaborates on what capital expenditure entails in the context of Fast-Moving Consumer Goods (FMCG) companies, the depreciation process, and how this influences a company’s cash flow.

Capital Expenditure: A Key Concept in Project Management

When it comes to project management, it’s crucial to understand what capital expenditure is. As Daniel explains, capital refers to the money you need to bring your project to life. This includes equipment, land, installation, and even design costs. In other words, it’s the initial investment required to create a physical asset to produce a product.

The term “capital” is used because these costs translate into the final value of the asset you’re implementing. Once the asset becomes a part of your operations, these initial costs become an ongoing expense through depreciation.

The Role of Depreciation in Balancing Cash Flow

Depreciation is a vital concept here. You’ve probably heard the term before. Simply put, it’s a way to spread out the cost of an asset over several years. You might spend a significant amount of money up front to purchase and install new equipment, but you don’t record that entire cost as an expense in the first year. Instead, you spread it out over the asset’s useful life.

But here’s the thing: while depreciation affects your income statement, the upfront capital expenditure directly impacts your cash flow. For example, if you buy a piece of machinery in year one, that cash outflow is felt immediately. However, the depreciation expense associated with that machinery will appear on your income statement over several years, impacting future cash flows.

The Impact of Capital Expenditure on a Company’s Balance Sheet

Let’s not forget that capital expenditure can significantly affect a company’s overall balance sheet. Think of it as the company’s financial report card. A company’s cash outflow due to project spending can greatly influence its financial health.

Daniel also points out that capital expenditure is not just limited to physical assets like equipment and land. It also extends to the labour involved in building the asset. So when calculating the cost of a project, you’re also accounting for the salaries of engineers and workers involved in the project. However, this doesn’t mean you can depreciate labour costs. Instead, these costs should drive efficiency, making your operations more productive.

To wrap things up, as a treasury professional, understanding the implications of capital expenditure is essential. It is crucial in managing a company’s budget, impacting its cash flow and overall financial health.

Image by Dmitriy from Pixabay

Understanding the Role of Cash Flow Targets and Share Buybacks in FMCG Companies

In this section, the conversation revolves around cash flow targets in fast-moving consumer goods (FMCG) companies and the mechanism of share buybacks. As Daniel Sanchez expounds on these concepts, he highlights their significance for companies and their shareholders.

Why Cash Flow Targets Matter

First things first, let’s define what a cash flow target is. Simply put, a company sets a goal for the amount of cash it aims to generate within a specific period, usually a year. Now, you might ask why a company would set such a target.

According to Daniel, cash flow targets play a crucial role for various reasons:

  1. Paying Dividends: Companies return some of their profits to their shareholders as dividends. Cash flow helps facilitate this process.
  2. Share Buybacks: Companies may decide to repurchase their shares from the open market, which can increase the value of remaining shares.
  3. Creating Reserves: Companies can save or reserve a portion of their cash flow for future needs. These reserves can be useful for acquisitions, emergencies, or other strategic investments.
  4. Investing in Capital: The fourth element is capital investment to grow the business. Smart capital investment can help boost the company’s growth and generate even more cash flow.

Having a cash flow target helps ensure the company can achieve these objectives. In FMCG companies, the goal is to maintain a steady cash flow and increase it year over year. This way, the company can continue to pay and ideally grow dividends, buy back shares, and build reserves for future growth.

The Implications of Share Buybacks

One of the intriguing ways companies use their cash flow is by buying back shares. The share buyback is a strategy companies use to decrease the number of outstanding shares in the market. There are a couple of reasons why a company might do this:

  1. Compensation: Some companies offer stock options to their employees as part of their compensation. When these options are exercised, the company must have enough cash to either repurchase these shares or issue them to the employees.
  2. Shareholder Return: Buying back shares can increase the company’s earnings per share, making the shares more attractive to investors and boosting the company’s market value. As a result, the company becomes more appealing from a financing perspective.

Once a company buys back its shares, they’re effectively taken off the market. This reduction in the number of shares increases the earnings-per-share ratio, making the company’s shares more attractive. It’s kind of like a pie: even if the size of the pie (earnings) remains the same if you cut it into fewer pieces (shares), each piece gets bigger. So, while the total number of shares decreases, the value of the remaining shares should stay the same or increase, depending on the company’s earnings.

To sum up, understanding these dynamics helps treasury professionals gauge a company’s financial health and its approach to increasing shareholder value. By monitoring cash flow targets and share buybacks, you can better understand a company’s financial strategy and its implications for growth and shareholder returns.

The Importance of Setting and Sticking to Cash Flow Targets in Corporate Treasury

This portion of the conversation addresses the relevance of cash flow targets within corporate treasury. Daniel Sanchez, the guest, clarifies the significance of these targets, particularly for public companies.

Cash Flow in Corporate Treasury

Cash flow is often referred to as the lifeblood of a company. As a treasury professional, you may already know that cash flow is one of the pillars of corporate treasury. Simply put, it measures how much cash is available within a company.

When a company invests in capital projects, for instance, by an engineering department, it is spending cash. This, in turn, reduces the available cash, hence negatively impacting the cash flow. It’s like dipping into a cash reserve to fund a project, which decreases the total amount left in the reserve.

Why Cash Flow Targets are Crucial

Now, let’s dive into why these cash flow targets are vital. Cash flow targets are particularly significant for public companies, i.e., companies whose stocks are traded on the market and have shareholders. Here’s why these targets are indispensable:

  1. Performance Tracking: Targets are useful for performance management. They serve as benchmarks companies aim to reach, allowing stakeholders to assess year-on-year performance.
  2. Investor Confidence: Consistently meeting cash flow targets can instil confidence in investors. It demonstrates that a company is reliable and can manage its finances effectively.
  3. Future Planning: Cash flow targets are crucial for financial forecasting. Knowing how much cash is expected to flow into the business, a company can plan for future investments and growth opportunities.

A company commits to generating a specific amount of cash over a particular period by setting a cash flow target. Achieving this target allows the company to distribute dividends to shareholders, repurchase shares, build reserves, and ensure sufficient cash for future investments.

Looking Beyond the Short-Term

The conversation further emphasizes that a company’s financial performance shouldn’t be evaluated solely on a quarter-to-quarter basis. Instead, a longer-term perspective is essential. Investors trust companies with a proven track record of meeting their targets and delivering value over time.

While quarterly performance can provide useful signals about a company’s current direction and immediate future, a year-on-year evaluation offers a more comprehensive understanding of a company’s financial health and growth trajectory. In other words, seeing the big picture rather than just the immediate snapshot is important.

Setting Cash Flow Targets and Maintaining them in Fast-Moving Consumer Goods (FMCG) Companies

In this part of the conversation, Guillaume asks Daniel how FMCG companies set and keep up with cash flow targets. Daniel provides a comprehensive response detailing the planning, forecasting, and execution processes.

The Planning Process

Establishing cash flow targets starts with planning. In this context, planning is more like forecasting. It’s about figuring out what the company’s future financial landscape will look like.

In simpler terms, it’s about making a roadmap for the company’s finances. It’s not about what the company needs to do tomorrow but what needs to be done the day after tomorrow and beyond.

The planning process involves both short-term and long-term forecasting.

Short-term Forecasting

Short-term forecasting typically involves planning for the upcoming year. This begins well before the start of that year, with the company listing out the projects they wish to undertake.

The key aspects of this phase include:

  1. Project Wish List: The company identifies the projects they want to complete in the coming year.
  2. Budgeting: The company decides on the budget for each project based on its wish list.
  3. Monthly Spending: After finalizing the budget, the company forecasts its monthly spending for each project, providing a clear cash outflow projection.

Knowing how much will be spent each month, the company can calculate its net cash flow and see whether it’s on target.

Long-term Forecasting

Long-term forecasting, on the other hand, is about envisioning the company’s growth and plans for the next two, three, four, or five years. This type of forecasting helps in making strategic decisions for the company. It tells the company whether they’ll have the capacity or equipment to produce a product in two years or if they’ll need to invest more.

The Execution Process

Once the planning phase is done, the next crucial step is execution. And this doesn’t only mean implementing the plan but also keeping track of it. The company needs to regularly check the progress to ensure everything is going according to plan and within the budget. This monitoring happens at different intervals – daily, weekly, monthly, quarterly, and yearly.

Setting and sticking to cash flow targets in FMCG companies involves a well-thought-out planning process followed by diligent execution. This process helps to ensure the company remains financially healthy, can fund its projects, and stays within its budget. It also plays a key role in making strategic decisions that impact the company’s long-term growth and stability. This way, it also ensures that the company can meet its cash flow targets, thereby gaining the trust of its investors.

How Do FMCG Companies Manage Cash Flow Targets and Handle Unexpected Project Changes?

In this section, Guillaume discusses the specifics of planning and adjusting cash flow targets, including the necessity of constant monitoring. They delve into the process of selecting projects based on Net Present Value (NPV) and Rate of Return (ROR) and discuss the flexibility required in managing these projects throughout the fiscal year.

Setting Up and Monitoring Cash Flow Targets

Planning for cash flow targets in a company begins much earlier than the start of the fiscal year. This plan is part of the company’s broader, long-term vision, mapping out goals for several years. Once a new fiscal year begins, it’s important to be accurate when setting up the targets, as it helps the company stay on track.

The company must also monitor the cash flow targets and make necessary adjustments. Just like a captain guiding a big ship, they must continually steer the company’s finances towards the right direction.

The Role of the Wish List

This wish list, which Guillaume appreciates, is essentially a list of projects the company wants to undertake in the new fiscal year. The company will assess each project based on its NPV and ROR before deciding whether to include it in its plans for the year.

Cash Flow Targets – Predetermined Yet Flexible

According to Daniel, most companies have their cash flow targets set up ahead of time based on their historical data and long-term visions. These targets are generally pre-established, even before a new team member joins the company.

However, these targets aren’t entirely inflexible. While the company can’t swing wildly from spending half a million to 20 million from one year to the next, it can adjust within a reasonable range. Balancing strategic investments, growth plans, and potential sacrifices is key. Sometimes, a project may have to be dropped if it’s negatively affecting cash flow or added if it improves productivity for that year. It’s a constant process of refinement and decision-making.

Adjusting Projects Midway

When Guillaume asks whether a project can be removed midway if it’s not delivering the expected NPV or ROI, Daniel confirms that it is indeed possible. This scenario is more common with small-scale projects and usually occurs in the early stages.

Large established companies tend to be conservative about the impacts on cash flow and treasury and prefer not to stop projects late. However, circumstances can lead to a project being delayed rather than entirely stopped, especially when unforeseen market changes occur.

In summary, managing cash flow targets is a dynamic, ongoing process requiring continual monitoring and adjustment. It’s about having a clear plan, being flexible enough to make necessary changes, and always keeping the company’s long-term vision in mind. It’s also essential to have a cautious approach to projects, assessing their impact on cash flow and being ready to make changes when necessary.

Altering Project Execution Pace to Meet Cash Flow Targets

In this portion of the conversation, Hussam inquires about the potential of manipulating project timelines to help meet cash flow targets. At the same time, Daniel explains why direct manipulation of market-facing projects isn’t a possibility and how internal productivity projects may be adjusted instead.

Market-Facing Projects Can’t Be Shifted

Daniel asserts that it’s generally not an option for most projects when asked about the possibility of slowing down or speeding up projects to match cash flow targets. Particularly for those projects with market deadlines, flexibility is limited. Launching a product or service on schedule is important because customers count on the company. Delivering as promised is critical to maintaining trust with consumers, as it is this trust that ultimately pays the salaries of everyone involved.

Internal Projects Offer More Flexibility

However, Daniel clarifies that some flexibility can be found within the structure of engineering and project management, particularly for internally-focused projects that do not directly impact the external market or customer experience. These projects, often aimed at improving productivity, can be slowed down if needed. For example, if the cost of a project is too great or significantly impacts cash flow, the company may decide to put the project on hold or slow it down.

Accelerating Projects to Seize Opportunities

Conversely, companies can also choose to speed up certain projects when there’s a clear opportunity. For instance, if a company is experiencing a significant increase in sales and wants to ride that wave to encourage more growth, it might decide to accelerate a project initially planned for the next fiscal year.

However, Daniel reiterates that these decisions – whether to slow down or speed up a project – are made at a high level within the company. These decisions aren’t taken lightly and require careful consideration and strategic planning.

In conclusion, the flexibility to adjust project timelines depends largely on the type of project and its impact on the market and the company’s cash flow. Market-facing projects have limited flexibility due to maintaining customer trust, while internal productivity projects offer more room for adjustment. It’s always important to balance the company’s needs with the expectations of customers and the current market conditions.

Achieving Cash Flow Targets Accurately and its Day-to-Day Impact on Engineering Directors

Guillaume further elaborates on the challenge of setting cash flow targets and achieving them with the utmost accuracy. He inquires how this challenge translates into the daily tasks for Daniel as a director in engineering. Daniel’s explanation covers the complexity of managing multiple projects across large organizations, scaling processes from local to global levels, and the periodicity of tracking progress and reporting.

Project Management in Large Organizations

Daniel begins by emphasizing the size of the organizations he works with, often managing numerous projects spread across different regions with teams of varying sizes. In such a complex and diverse environment, tracking cash flow targets and project progress begins at a local or project level. This could be tied to a specific product, region, or platform.

At this level, regular assessments (weekly, monthly) are conducted to compare the current situation against the targets, identify deviations, and explore possibilities to compensate for any discrepancies. This dynamic process involves regular discussions and decision-making based on up-to-date data.

Scaling up the Process

The process doesn’t stop at the local level. It needs to be scaled up in two ways:

  1. Geographically: The tracking and decision-making processes must be escalated from the local (e.g., country or product level) to the global level. This is crucial because, in a large company, the corporate treasury function is a global operation. Every region impacts the company’s overall cash flow, so it’s necessary to aggregate these local results into the company’s overall targets.
  2. Timeframe: The process also needs to be scaled up in terms of timeframe. While monthly tracking is important, quarterly tracking holds a higher significance level, and yearly assessments are crucial. This is especially true for public companies obligated to issue quarterly official reports. The accuracy of these reports is vital to maintain trust with stakeholders. When the year is closed, everything is laid on the table, making accurate yearly tracking integral to overall financial management and transparency.

So, as an engineering director, Daniel plays a crucial role in this dynamic and multi-faceted process. His day-to-day tasks involve overseeing projects, tracking progress against targets, making necessary adjustments, and scaling up the processes to fit within the broader scope of the company’s cash flow management. His work ensures that the company sets realistic cash flow targets and takes the necessary steps to achieve them precisely.

Striving for Accuracy in Cash Flow Targets: Balancing Over and Under Spending

Guillaume probes further into the accuracy aspect of cash flow management. He is curious whether it is desirable to exceed the targets set by spending less or earning more. He asks if staying within the specific window set is preferable or if spending less on a project (leading to better ROI and NPV) is considered beneficial. In response, Daniel highlights the importance of the scaling part of cash flow management and discusses the strategy behind handling under or overspending projects.

The Importance of Scaling

Daniel explains that the driving force behind most companies is not just one project but multiple projects. In such a scenario, there will always be some projects spending less and some spending more than the estimated budget. This is where the scaling part becomes extremely critical – moving from the local to the regional and global levels.

Scaling helps maintain a balance between these varying project expenditures. It’s like checking and balances to ensure the company’s cash flow stays within the set targets. According to Daniel, this process needs to happen as soon as possible, which is why the monthly check-ins (or the ‘monthly drumbeat’ as he calls it) are essential.

Managing Fluctuations in Spending

The ideal situation, Daniel mentions, would be a linear chart showing cash spending steadily rising from the bottom left to the top right, hitting the 100% mark at the end. However, this graph fluctuates over time due to the dynamic nature of projects and their expenditures.

The appropriate decisions can be made by monitoring these fluctuations closely and seeing where a project is spending less or more. These might involve stopping, starting, or accelerating a project to better align with the company’s overall cash flow targets. Therefore, in managing cash flow, the focus is not solely on adhering to or exceeding set targets but adjusting to the evolving circumstances to maintain financial health and stability.

The Implications of Spending Less than Projected

In this exchange, Hussam wonders about the issue of spending less money on projects. In his view, less expenditure seems good at the company level. Daniel’s response sheds light on two aspects of this scenario: the positive impact of intentional savings and the negative implications of unplanned under-spending.

When Spending Less Isn’t Always a Good Thing

Spending less money, on the face of it, appears to be beneficial. However, as Daniel points out, consistently spending less than the set budget could signal a problem in the process. To illustrate his point, he presents a hypothetical scenario where 50% of your projects spend 50% less than projected.

While this may initially seem positive, it can have negative repercussions. Imagine that you communicated externally at the start of the year that you would spend a specific amount from your cash flow target. If your projects spend significantly less, the unspent money at the end of the fiscal year represents a lost opportunity.

Lost Opportunities with Unplanned Under-spending

Unspent funds earmarked for specific projects could have been utilized throughout the year. This money might have been allocated to discounting products to increase sales or invest in R&D for developing new products.

So while spending less when planned and intentionally is good, spending less by chance is not beneficial. If a company doesn’t spend the allocated funds, it misses out on other potential opportunities for investment. This unused money ends up sitting idle in the company’s bank account, which doesn’t help the company grow.

The Importance of Setting Accurate Targets

Another point Daniel makes is about the reliability of a company’s ability to manage projects and set accurate targets. If a company consistently spends less than its projected budget, it could lead to a loss of faith in its ability to deliver on its commitments. Even though underspending might seem positive, it could hamper the perception of the company’s efficiency and reliability. Thus, while good savings should ideally result from strategic decisions, not faulty budgeting or planning processes.

Cash Management: More Than Just Capital Expenditure

Guillaume asks Daniel if anything else might give us a better understanding of cash management, including cash flow forecasting and spending. Daniel’s response explores the broader picture of project management and its implications on corporate treasury. He emphasizes that cash management is not only about capital but also about managing resources efficiently.

The Role of Resources in Cash Management

Daniel stresses that as project managers, particularly from an engineering perspective, it’s not just capital that directly impacts cash flow. The organization behind it plays a crucial role too. He mentions the ‘endless search for productivity,’ hinting at the importance of managing resources.

In this context, ‘resources’ refers to the human capital involved – the number of engineers needed for projects and the budget allocated to manage them. These aspects may not directly relate to a specific project but are extremely important.

While these resource management aspects may not directly affect your cash flow, they do have an impact on your overall budget for the fiscal year.

Continual Improvement and Cost Efficiency

The conversation moves towards the idea of continual improvement and cost efficiency. The question becomes: Can you maintain the same output level, if not improve it while reducing expenditure over time? This refers to Daniel’s hypothetical situation where he spent a hundred thousand last year, and his future goal is to progressively spend less while still meeting cash flow targets, delivering product innovation, and completing necessary projects.

This point is significant because it’s not just about creating and getting products on the shelf. It’s also about how you manage an organization. An organization represents an expenditure for a company, and as such, it impacts corporate treasury.

Understanding the broader implications of cash management involves a comprehensive view of capital and resource expenditure. Efficient management of these aspects contributes significantly to corporate treasury health, supporting sustainable growth and profitability.

Payment Conditions and Terms in Corporate Treasury

Guillaume asks about the typical payment terms and conditions for suppliers in Fast-Moving Consumer Goods (FMCG) companies, recognizing that these aspects play a central role in corporate treasury. Daniel provides a comprehensive response, dividing the question into two main sections – payment conditions and payment terms.

Photo by RDNE Stock project on Pexels

Understanding Payment Conditions

Payment conditions refer to how and when a company pays for goods or services. Daniel uses the example of buying a car to explain this. Like individuals who can pay for a car outright or through financing, companies also make similar choices when paying for goods or services. However, he stresses that for a company, the best approach is usually to pay over time. This method allows the company to maintain a healthy cash flow.

Payment conditions play a significant role when buying large equipment or building a factory. Payments are often broken down into several stages:

  1. Down Payment: This payment occurs at the beginning, building trust with the supplier and enabling them to purchase materials and begin their work.
  2. Intermediate Payment: The second payment is usually made when a part of the work is completed, such as when equipment is delivered, or a building is completed.
  3. Final Payment: The last payment is made once the project or product has been delivered and performs as expected.

Understanding and planning for these payment conditions is critical to a project manager’s job. They need to forecast accurately when each payment will occur and how much each will be.

Exploring Payment Terms

Payment terms, on the other hand, refer to the timeframe within which a company pays its suppliers. Companies can decide to pay suppliers immediately or delay payments to 30, 40, 50, or even 60 days after invoicing.

These payment terms are often used to negotiate between the company and its suppliers. The delay between when a company acknowledges a supplier’s invoice and when the money leaves the company’s bank account provides extra time. The company can use the money for other value-driving activities during this period.

To sum up, payment conditions and payment terms are significant aspects of cash management in corporate treasury. They help the company maintain a healthy cash flow while building strong supplier relationships.

Typical Payment Terms in FMCG and Their Impact on Cash Flow

Guillaume’s question focuses on the typical payment terms in Fast-Moving Consumer Goods (FMCG) companies, particularly concerning the timeframe. He assumes that the longer the payment term, the better it is for the company, as it can keep its cash longer and potentially earn interest. However, Daniel clarifies this point, explaining that while long payment terms might benefit the paying company, they might be detrimental to the receiving party.

The Balancing Act of Payment Terms

The key is to find a balance that suits both parties. According to Daniel, a typical payment term in FMCG companies might be around 60 days. An extension to 90 days might be considered extreme, but it’s not entirely unheard of. The deciding factor here is trust. If a company has a longstanding, reliable relationship with its supplier, the supplier might be willing to agree to extended payment terms.

This trust factor becomes even more critical when the supplier has the backing of a financial institution. Knowing the payment is guaranteed, the supplier can tap into their lines of credit if needed.

The Role of Market Weight in Payment Terms

The position or weight of a company in the market plays a significant role in determining payment terms. Established companies with a strong market presence have more leverage and can negotiate longer payment terms because suppliers trust that they will make good on their payments. On the other hand, newer or smaller companies may not have the same luxury.

For instance, a new company approaching a supplier might be asked to pay upfront because the trust isn’t established yet. This difference highlights that payment terms are not just about money but also about trust and market reputation.

To put it simply, the key takeaway from this discussion is that while longer payment terms may seem beneficial for companies, they also need to consider the impact on their suppliers and their relationship with them. The balance between maintaining a healthy cash flow and sustaining good supplier relationships is essential in managing an effective corporate treasury.

Establishing Payment Terms with New Suppliers: Adjustments and Trade-offs

The conversation progresses with Guillaume suggesting that when a company starts a new relationship with a supplier, the payment terms might need to be adjusted. They might not immediately reach the typical 60-day terms seen with established relationships. He also adds that as trust builds, payment terms can be extended. Daniel’s response to this gives us a nuanced understanding of the strategies to establish new supplier relationships.

Leveraging Payment Conditions and Terms

In this situation, Daniel suggests that companies have two levers they can use: payment conditions and payment terms. Payment conditions refer to how a company pays for a product or service, for example, whether they pay in full upfront, make a down payment, or pay in instalments. On the other hand, payment terms refer to when these payments are made, such as immediately or within a specific number of days.

By carefully managing these two aspects, companies can control their outgoing cash flow and create mutually beneficial agreements with suppliers.

Trade-offs and the Role of the Project Manager

Sometimes, there may be trade-offs in trying to secure a deal with a particular supplier. For example, a company may need to agree to a shorter payment term or different payment conditions than they usually prefer. In these situations, it’s the project manager’s job to determine how these trade-offs can be compensated elsewhere.

Maybe there’s another project area where costs can be reduced, or they can negotiate better terms with another supplier. It’s about looking at the big picture and making the best overall decision for the project and the company.

So, When starting a new supplier relationship, a company may need to be flexible with its typical payment terms and conditions. This flexibility can build trust and contribute to a successful long-term relationship. However, it’s crucial to monitor the overall impact on the company’s cash flow and make necessary adjustments elsewhere. This balance is a core part of effective treasury management.

Supplier Relationships and Payment Terms: Trust, Quality, and the Role of the Project Manager

Hussam asks Daniel if a supplier’s trustworthiness and the quality of their goods or services impact the payment terms companies establish with them. He also questions whether different suppliers might have different payment terms based on these factors. Daniel’s answer provides a unique perspective on the role of a project manager in managing relationships with suppliers.

The Impact of Trust and Quality on Payment Terms

Daniel agrees with Hussam that trust and quality can indeed influence payment terms. If a supplier is trusted and provides high-quality goods or services, a company might be willing to offer more favourable payment terms, like paying more upfront. Conversely, if a supplier has a history of delivering subpar goods or services, a company might want to delay payment until they’ve confirmed the quality of the products or services.

The Role of Purchasing Organizations

Daniel then introduces the concept of purchasing organizations within large corporations. These teams lead and have the legal power to negotiate payment terms with suppliers. A project manager’s role is to work with these purchasing organizations and liaise with suppliers. This structure ensures that the decision-making process remains impartial, free from individual biases.

The Importance of Stewardship and Accountability

According to Daniel, the project manager has access to a significant amount of capital and is responsible for maintaining high standards of stewardship and accountability. This means they must manage the company’s resources carefully and responsibly, always making decisions that are in the company’s best interests. They collaborate with other organizational units like purchasing rather than making individual decisions about payment terms with suppliers.

So, a company’s relationship with a supplier, including trust and the quality of goods or services provided, can influence the established payment terms. Large corporations often have purchasing organizations to handle these negotiations. In this context, the project manager’s role is to ensure responsible and accountable use of the company’s resources while collaborating with other teams to establish and maintain successful supplier relationships.

Supply Chain Financing, Line of Credit, and the Balancing Act of Payment Terms

In this section of the podcast, Hussam, digs deeper into the topic of supplier payment terms. He questions Daniel on the concepts of down payments, suppliers’ use of lines of credit, and supply chain financing. Additionally, Guillaume, queries about the payment terms of retail companies that form the clientele of Fast-Moving Consumer Goods (FMCG) companies. Let’s break these down and understand them better.

Down Payments and Lines of Credit

Hussam brings up the scenario where a company might offer a supplier a 30% down payment on a purchase order but delays the full payment by 90 days. He asks if suppliers can use this commitment as leverage to access a line of credit. Daniel explains that suppliers often have a line of credit for short-term financing. The promise of a down payment can help them tap into this line of credit, potentially without paying interest.

Supply Chain Financing

Next, Daniel introduces the concept of supply chain financing. Here’s how it works: when a large company like an FMCG promises to pay a supplier in, say, 90 days, a financial institution steps in. This institution, trusting the large company’s promise to pay, offers the supplier an advance on that payment. The catch is that the supplier has to pay a small interest rate, usually lower than they’d pay on a regular loan.

Why would a supplier go for this deal? Because it gives them access to cash sooner. They can use this cash to prepare for the large company’s order. When the 90 days are up, the large company pays the financial institution, not the supplier. The supplier has already received their money, minus a small interest fee.

Payment Terms in the Retail Sector

Finally, Guillaume asks about the payment terms between FMCG companies and their retail clients. He’s curious how these terms might differ from those between FMCG companies and their suppliers. Daniel’s response here isn’t as detailed as in earlier parts of the discussion, but he makes an essential point. His company tries to pay their suppliers as late as possible while trying to get paid as early as possible from their clients. It’s a balancing act that helps keep their balance sheet looking healthy.

Free Cash Flow Productivity: What Is It and Why It’s Important?

In this section, Guillaume asks Daniel about Free Cash Flow Productivity (FCFP) and its strategic importance, particularly to Fast-Moving Consumer Goods (FMCG) companies. Let’s dive into Daniel’s insightful response and understand why this metric is significant in business and investor communication.

Free Cash Flow Productivity Defined

Firstly, let’s clarify what Free Cash Flow Productivity is. Simply put, it’s the ratio of a company’s free cash flow to its net earnings. It’s an accredited accounting measure that public companies must report to some degree. In short, this metric tells you how much money a company generates that it can use for any purpose it wishes, compared to the money coming in.

The Implication of FCFP for Businesses

The higher this FCFP percentage, the healthier the company is financially. And here’s why this metric is crucial:

  1. Dividend Payments: A high FCFP indicates the company’s ability to maintain or grow its dividend payments to shareholders over time.
  2. Share Buybacks: Companies with a high FCFP can buy back their shares, contributing to their total shareholder return model.
  3. Future Investments: A high FCFP allows the company to build reserves for acquisitions or future investments, strengthening its financial position for growth.
  4. Self-funding: As Daniel explains, FMCG companies typically self-fund their operations, so a high FCFP ensures this “bloodline” remains healthy year after year.

The Importance of Consistency in FCFP

It’s also crucial to note the importance of consistency in achieving FCFP targets. Daniel points out that a company with an inconsistent FCFP performance might raise red flags for investors. If a company delivers a high FCFP one year and then a significantly lower FCFP the next year, it can cause concern. Investors may question the company’s financial health and stability, potentially impacting their investment decisions.

The Implication of Free Cash Flow Productivity at Group and Project Management Levels

In this part of the podcast, Guillaume seeks to understand how Free Cash Flow Productivity (FCFP) impacts a company’s group level and project management strategies. Daniel provides an in-depth answer explaining the integration of this crucial financial metric at various levels within a business.

Clarifying the Difference Between Free Cash Flow and Net Earnings

Before we dive into Daniel’s response, let’s take a moment to understand the distinction between free cash flow and net earnings. Unlike net earnings, free cash flow excludes non-cash expenses like depreciation, amortization, and unrealized gains or losses. This focus on cash rather than accounting earnings gives a clearer picture of a company’s liquidity and the actual cash it generates.

Impact of FCFP at Group Level

Moving onto the main discussion, big companies typically comprise various product lines, sub-companies, or legal entities. These different business units each contribute to the company’s overall FCFP target.

Imagine a large FMCG company that sells various products like biscuits, laundry detergent, and diapers. Each of these product groups contributes to the overall company’s FCFP. The company’s success in achieving its FCFP target relies on the sum of these parts, making each team player’s contribution crucial.

FCFP at the Project Management Level

Daniel then explains how this concept trickles down to the individual managing a capital project. The targets for the FCFP percentage are set at the top and then cascade down to the regional and national setups and, finally, to the individual projects.

Each project manager should know their specific target for that quarter or year. The combined targets of all project managers contribute to achieving the overall FCFP target of the company. It’s like a jigsaw puzzle, each project manager holding a piece. If one fails to meet their target, it affects the entire picture.

The Need for Regular Reviews

Regular reviews of the cash going in and out, especially compared to what’s expected, are vital. This practice isn’t meant to complicate things but to provide a practical viewpoint on the company’s financial status. Knowing these targets helps individual project managers understand their roles in contributing to the company’s overall FCFP.

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Role of Project Managers in Meeting Cash Flow Targets and the Possibility of Restating These Targets

In this part of the podcast, Hussam asks Daniel to discuss the compensation strategies between project managers when meeting cash flow targets and if it’s possible to restate them. Daniel elaborates on this, providing insights from his experience in a fast-moving consumer goods (FMCG) company.

Collaborative Efforts to Meet Cash Flow Targets

In a big company, multiple project managers typically work towards achieving cash flow targets. If a project manager struggles to meet their target, they can collaborate with another manager to compensate for the shortfall. If this approach doesn’t work, they may consider going one level up in the organizational hierarchy for assistance. However, if this collaborative effort fails globally, it could put the company’s financial health at risk.

It’s essential for you, as a treasury professional, to keep a close eye on how these targets are met. Regular communication and collaboration among project managers can ensure the company remains on track to hit its financial targets.

The Importance of Efficient Spending

Hussam then moves on to discuss the importance of efficient spending. He suggests that project managers should be rewarded for spending less by finding cheaper ways to execute projects. The saved cash could then be allocated to other projects or used to restate the company’s cash flow targets for the fiscal year.

Restating Cash Flow Targets

Responding to Hussam’s query, Daniel explains that cash flow targets can be restated, but this usually happens internally. The decision to publicly restate these targets typically occurs every quarter during shareholder meetings or earnings calls.

Daniel also shares an interesting insight: many companies restated their earnings expectations during the first two quarters of 2022 due to various factors. However, he emphasized that restating cash flow targets isn’t typically a company’s first preference.

Adjusting Capital Projects Based on Market Dynamics

Next, Hussam and Daniel delve into how FMCG companies, which operate in a highly dynamic market, might need to delay or even cancel some projects due to sudden changes in demand. However, Daniel clarifies that capital projects aren’t usually the sole reason for these adjustments. Significant external factors, such as wars, commodity price shifts, or pandemics, are more likely to necessitate major changes in the company’s financial targets.

Personal Financial Management: A Takeaway from Corporate Treasury

As the conversation draws to a close, Daniel leaves us with an important takeaway: the principles of corporate treasury management can also be applied to personal financial management. Staying on top of your cash flows, setting a spending target, and finding ways to compensate for any shortfalls are just as important for an individual as they are for a corporation.


Wow, what a journey we’ve taken together! Through this article, we have delved into the complexities of treasury management in large companies. We’ve broken down challenging financial concepts and discussed the importance of effective communication and collaboration within various levels of an organization.

Let’s revisit what we’ve learned. We began by demystifying the differences between free cash flow and net earnings. As a treasury professional, you understood how non-cash expenses like depreciation and amortization factor into these calculations. You also learned how these metrics reflect your organization’s financial health and inform strategic decisions.

From there, we discussed how goals and targets flow from the group level to individual project managers. We stressed the importance of each player’s contribution to achieving the company’s targets. This is where the role of effective communication within your organization shines.

Remember the part about restating cash flow targets? Restating them is possible, but we learned it’s not always desired. It’s usually a response to external circumstances that are out of our control – think pandemics or significant shifts in the market. In these moments, we learned to stay flexible and adapt our strategies accordingly.

And let’s not forget the profound advice Daniel Sanchez gave us about personal financial management. Good corporate treasury management principles can also be applied to your finances. Isn’t it empowering to think you could shape your financial future by following these strategies?

As we wrap up, it’s important to remember that while we’ve covered a lot, there’s always more to learn in the ever-evolving world of treasury management. Keep learning, keep growing, and remember every step you take towards financial mastery is a step towards a brighter future for your company. Here’s to your success!

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