Michael's M&A Playbook: Cash Flow Management
Cash is King - This is a general rule in financial management and also applies to the post-merger phase of an M&A transaction. Understanding the details of the target company's cash flow, implementing tools for better forecasting, and using synergies are critical to successfully integrating cash flow management. Here are some suggestions that I found helpful in my transactions.
Tips for A Successful Integration of Cash Flow Management
Dig into the details of the historical cash flows. Most likely, you have already analyzed the cash flows during the financial due diligence; however, once you acquired the target company, you can access data you didn't have before. Use more metrics, talk with more people, and better understand how cash developed in the past.
Develop a 13-week cash flow forecast that you update weekly. If you don't have it already, create a 13-week cash flow forecast model. There are two reasons for that. First, the 13-week cash flow model is a detailed bottom-up plan of the cash in- and outflows. Many companies use only monthly cash flow models, and the 13-week CF model will help you to understand the details. Secondly, when you get additional financing from banks or other financial institutions, they often require you to report the 13-week CF forecast.
Link the bottom-up and top-down cash flow models. Once you have the 13-week cash flow model, develop an integrated income statement/balance sheet/cash flow model that calculates the cash flows with the income statement and working capital (and other cash flow) assumptions. Usually, companies have such an integrated model to forecast monthly or annual cash flows. The critical step is to compare the 13-week cash flow model results with the integrated CF forecast model. This approach is a great sanity check that helps you to find issues in the planning assumptions and tools. It is also helpful to better understand the cash flow forecasts.
Find synergies in working capital management. There are many opportunities based on synergies between the companies. To name a few, improve your purchasing by negotiating better payment terms and lower purchase prices. Here is a link to another article from me where you find more about this topic. Analyze your inventory and the warehouses of all companies. Check whether you can combine some locations. Merge your accounts receivable and payable teams for better coverage of your clients and suppliers. Align processes and implement, for example, a standard dunning process.
Consolidate bank accounts. Analyze which bank accounts the companies use. Most of the time, there are opportunities to close some bank accounts and consolidate others. Start an RFP (request for proposal) process to get offers from different banks. The combined companies are bigger, which helps in the negotiation.
Use the treasury function for better short-term investing and hedging strategies. If one of the companies already has a treasury department, ensure the other companies use that knowledge. Some topics, like foreign currency or interest hedging, are complicated, and smaller companies may have opportunities to improve those cash flow factors. If you don't have a treasury function, it may be time to create one.
Create processes that use the best practices of both companies. One of the biggest problems in the post-integration phase is that the acquirer often dictates the policies. The most productive method is to use the best approach from both companies. You can find here more tips for better change management.
Use synergies of scale to invest in better software solutions. The bigger the combined company, the better the economics to invest in software tools that help reduce manual entries, provide better reporting capabilities, support better solutions for cooperation between teams, and facilitate the consolidation and reconciliation of data.
Talk about Good News
Whenever you have good news, let other people know. The feeling of accomplishment is important for your teams. Celebrate successes, and promote your projects and employees. I call it internal public relations. Your employees will appreciate it. It is one of the essential elements of good leadership: Support your team in difficult times and celebrate them in good times.
I hope these tips will help you succeed in your post-merger integration of cash flow management. There are many other things that you can do, but when you use the ideas above, you will have a headstart. Feel free to contact me to discuss specific mergers and acquisitions examples.
