financial management, business strategy

'Back to basics' is a far safer clarion call in management than in politics. Along with KISS ('Keep it simple, stupid'), the return to basics is the stock-in-trade of turnaround managers, company doctors and other revivalists.

But which basic is most fundamental? The answer has to be cash. Visiting a business school once, I was told that a sentence of mine was pinned to the bulletin board. This immortal truth consisted of just six simple words: 'Cash in must exceed cash out.'

As the academics plainly knew, many managers in large companies never master this concept, simple or not. Big-time executives are sheltered from the realities of cash flow by the finance director and his cohorts. In smaller companies, there's no shelter: if the cash runs out, the rains pour in.

Yet few businesses are managed with cash first and foremost in the managing mind. Trevor Grice, the chief executive of Wace Group, the graphic arts business, takes a different and very robust stance. His managers' bonus payments, for instance, are linked to both operating profit and cash generation: if the managers fail one test, they fail both.

The logic behind this iron rule is that increasing efficiency always shows up in the cashbox. Grice sees business strategy as a simple three-legged stool. One leg is sales expansion - the target of all the marketing effort and product plans to which companies devote so much splendid energy. But without the other two legs, expanding sales may not prove such a warm and wonderful experience.

This vital pair are cost reduction and price increases. Combine the two, and profit margins must rise delectably. Combine that with a successful assault on working capital, and the result will be a warming pile of extra cash. Let the costs and the capital run out of control while expanding sales, though, and the cash will also go into a tailspin - and ruin can swiftly follow.

Working capital is intimately involved with both cash and efficiency. The definition is the money tied up in stock of all kinds, plus the difference between creditors and debtors. At major US companies, the resulting sum averages around 20% of sales. But that average may be grossly excessive. According to Fortune magazine, working capital zealots are now aiming at a target of zero.

The secret lies in speed. Use stock more rapidly, fill the customer's requirements faster, get the payment in sooner, and you require less capital and generate more cash. Eastern wonders like just-in-time delivery and kanban stock control work the necessary magic rapidly - and are neither mysterious nor complex. But there's an even simpler speed-up method.

If you can, cut out 'hand-overs' (when work or paper passes from hand-to-hand). Big business fast-breeds hand-overs in amazing style. One example is an insurance company where a simple policy had to pass through 13 or 14 head office departments - and where a well-staffed extra process was needed just to keep track of the paperwork's passage. The net result: issuing this standard product required 24 days, when only 10 to 30 minutes was necessary.

That example comes from Jim Champy, a high priest of re-engineering. This new-sounding management religion can also work wonders - but again without magic. The key principle is to identify and examine the processes which are vital to the business: work through them to find the bottlenecks, hand-overs, etc: and then work with all concerned to reduce cost - and increase speed.

Speeding-up is grist to the mill for cost-cutters like Grice. But he's equally emphatic about the price side of the profit margin equation. Managers commonly don't seek to exercise control over realised prices. They give away profits and cash with price-cuts, discounts, promotions, over-generous terms, etc., all in the feverish effort to retain or gain business.

You should ask rather: What percentage of business will be lost if I raise realised prices by x% - or gained if I cut them? How much business can I lose before damaging profits - and how much must I gain to compensate for x% lower prices? These critical questions are rarely posed. The most common result isn't overcharging, but under-pricing. That's not going back to basics: it's going forward into failure.