Cash flow forecasts are all about timing and the biggest impact of cultural differences on any business is that they slow things down – and anything that slows things down will hit your cash flow.
It might seem a bit of a stretch to suggest that cultural awareness training can improve cashflow forecasting but I am sure that it can. Obviously, I’m not suggesting that developing higher levels of cultural fluency and understanding can improve your CFO’s excel spreadsheet capabilities but it can definitely help an organisation to better understand the dynamics which will impact on the business in the future – if that business has an international element.
I feel that there are four key areas where developing greater levels of cultural awareness can impact on the effective development of medium to long-term forecasting. If it is true that you need a good understanding of the dynamics of your business environment to be able to accurately make forecasts, then surely the following issues must be significant in that process:
All four issues are fundamental to understanding the speed at which your business might evolve in overseas markets. We often find that Western clients apply the same criteria (that of their home market) to every market they operate in and that this can result in a massive divergence between the cashflow forecasted and actual cash in the bank.
Let’s look at these four issues and see why cultural awareness and understanding would be beneficial.
Things usually happen in business after decisions have been taken and therefore understanding the decision-making process in new markets and getting a feel for when things might start moving is critical. The problem is that people often don’t have a clear understanding of decision-making processes in different markets. Businesses often make forecasts on the assumption that decisions in a new market will be taken at a similar pace to ‘back home.’ Unfortunately, they very often are not – the decision-making process in certain markets is very often very slow.
If we take Japan, for example, the decision-making process is a highly complex combination of consensus and hierarchy. You will be waiting for your Japanese counterparty to make a decision when they very often haven’t even agreed what the question is that they are trying to answer.
The most frequent question we are asked when running Japan cultural awareness training programmes is: ‘how can we get the Japanese to make decisions more quickly?’ The simple answer is you can’t. The Japanese will make decisions at the pace they are comfortable with and no amount of pushing is likely to speed things up (in fact it is more likely to push everything back). Just to put this into context, a very senior Japanese businessman working in the UK recently asked me: ‘how do I get my British colleagues to make decisions more slowly?’
From a cash flow forecasting point of view, I would double your timescale estimate around when a decision might be reached when working into either consensually oriented cultures or countries which are massively bureaucratic.
The biggest cultural difference to be found globally is that some cultures put business before relationships whereas other cultures place relationships before business. In business-first cultures, people will do business with you if your product is right, your price is right, and your delivery is right. However, there are many cultures in which people will not do business with you even if your product is right, your price is right, and your delivery is right – until and unless they have decided that you are the type of people they would be happy and comfortable to do business with in the long-run. The relationship must come first; only then might some business follow. (This does not mean that your product, your price and your delivery are unimportant – they are still critical, but they become of importance later in the cycle).
Which countries put relationships before business? Quite a few:
In fact, most countries in the world place relationships before business – if you are in the States or the UK you are very much in the world minority.
How does this issue impact on cashflows? In two very significant ways. Firstly, it can take a long time to forge meaningful productive relationships and secondly the relationship-building process will probably involve multiple country visits and more travel and accommodations costs than you anticipated. How are you going to factor these two uncertainties into a meaningful cash flow forecast?
The World Bank ‘Ease of Doing Business Index’ is there for a reason. It is designed to show how easy you will find doing business in any given country and it gives a fairly good indication about timescales. The lower any country is on the list, the longer and more tortuous you are likely to find setting up a business or exporting goods and services to that country.
Many people confuse the ‘Ease of Doing Business Index’ with Transparency International’s ‘Corruption Perception Index’ and therefore think that corruption is the issue that slows things down in certain countries. Whilst corruption can be a real issue in some places, the challenges which will impact on timescales much more on a global scale is bureaucracy. Certain countries are just so bureaucratically structured that the simplest of tasks can take a very long time.
Of course, local civil servants, tax authorities, import regulations and the like all contribute to the snail’s pace progress made when trying to set up an overseas entity but one factor often overlooked is that of bank account opening. The big global banks are now so hamstrung by compliance regulations that the simple act of opening a new bank account in a new territory can hold things up for months – even if using the same bank that you use at home.
Our advice is always to use local experts who know their way around the bureaucracy and who already have good working relationships in-country. It might make things a bit more expensive in the short term but will probably help cash-flow in the medium to long term.
An understanding of the local culture and ‘how things work’ in any given country will help you to guestimate timescales more effectively and therefore improve your cashflow forecasting.
Do customers in your home market always behave as you predict? I’m assuming the answer to that questions is ‘no’. Then how can you accurately predict the behaviour of customers in a new market when you have no historical precedents and very little market understanding? It’s impossible to make accurate forecasts when you are largely in the dark.
Many of our clients are wildly optimistic in their revenue growth modelling for new territories. They frequently make two fundamental errors:
Nothing will impact on cash flow forecasts more than getting revenue projections badly wrong. Understanding local cultural preferences will be critical in developing accurate numbers.
I am not saying that cultural awareness training will instantly resolve all the issues above. However, what well delivered, targeted training can do is focus minds and make people more analytical and questioning in their approach to new markets. Cultural awareness training can help you challenge the norms of your business and improve innovative thinking.