Winning the Cash Flow Battle

January 24, 2008

Think back to the time when you were young. Remember when you saved your allowance, did odd jobs or relied on Grandma to give you the money to buy that really special baseball card or polka-dot hair bow? Your parents probably were supportive, yet benevolently instructive when they stressed, again and again, the benefits of income and savings.

What they may have failed to mention were two words that complement the entire scenario - cash flow. If you had proper cash flow, you would have enough money ready to go and ready to spend, instead of reacting to a potential purchase by trying to come up with the pocket change.
Today, the way we manage our businesses really isn’t any different than this somewhat dated scenario, yet companies sometimes forget about cash flow. The results can often be disastrous.

Think, for example, of the dozens of failed dot.coms in 2001. So many businesses banked on venture capital funds, spent the money on inventory, assets, employee salaries and had nothing left in reserves. It wasn’t uncommon to walk into a hip and happening Internet retailer on the west coast only to find three people doing the job of one.

With so many rainy days dampening the sunny ones, these companies were forced to lay off staff and eventually close their doors, resulting in thousands of unemployed workers.

If these companies had relied, instead, on the cash flow process, they may have been able to survive, albeit without that extra espresso machine or rock climbing wall..

Increase the Speed
Cash flow refers to the movement of cash in and out of your business. Whether you sell widgets or windows - and are General Electric or a small- to medium-sized business - money comes into your business in the form of cash received from customers at the time of the sale. It also includes cash received from accounts receivable and income from other activities, including sales commissions.
If cash flows in, it’s got to flow out. Cash flows out of your business to finance everything you purchase to actually run the company: inventory, raw materials, payroll, expenses, rent, utilities, interest on loans, equipment lease payments and accounts payable on trade credit that other businesses have extended to your company.
The key to improving cash flow is an economic concept we all learned, but perhaps ignore: simply improve the speed of money flowing into your company while decreasing the rate at which money flows out. For the entrepreneur or small business, this may mean pre-billing for any work incurred, or delaying expenses until necessary. Larger businesses with employees may want to undertake similar tasks … only on a larger scale.

Paint by Numbers
The missing link, therefore, is timing. Mark Deion, president of Deion Associates & Strategies, Inc in Warwick, R.I., says you could go out of business waiting to get paid.

“For example, it costs you $100,000 to produce something and a customer is willing to pay you $1 million,” he says. “We would agree that $900,000 is a great profit margin, but what if you have to pay the $100,000 in December and your customer isn’t going to pay you until April?”
While there are many theories on how to achieve cash flow success, most financial advisors agree on a multi-step approach that encompasses a variety of simultaneous techniques. Here are six steps for consideration.

1. Establish a receivable process. You can improve your chances
    of receiving timely payments from your customers by setting up
    an A/R process to record sales, generate invoices and monthly
    statements, and track your customers’ current and past-due
    balances.

2. Forecast cash flow. Study your customers’ paying habits so you
    can begin to predict when and how much they’ll pay. Analysts
    say the amount you forecast should be within five percent of
    your monthly receivables. If your predictions are dramatically off
    schedule, a cash flow problem could be looming.

3. Track expenses. Each month, compare projected expenses to
    actual expenses. This will help you anticipate the need for more
    cash and react immediately. For example, if you unexpectedly
    have to repair broken machinery, you can cut expenses
    elsewhere or take an advance on a credit line.

4. Project sales. It’s easy to assume the demand for your products
    and services will be high, but it’s safer to base your projected
    sales on facts rather than assumption. When you project
    accurate revenues for a specified period, you can spend
    accordingly. It isn’t magic; just common sense. For example, use
    past experience to project future sales, and talk to your
    customers or clients to determine their future needs.

5. Track sales. Even after you’ve projected sales, monitoring
    actual sales ensures you’re on the right track. If sales dip below
    projections, the sooner you make adjustments, the better.
    Adjustments include cutting expenses, extending credit or
    borrowing money.

6. Prepare for cash flow imbalances. Nothing is ever 100 percent
    steady, and for many businesses, it’s more than normal to
    experience cash flow fluctuations throughout the year.
    Anticipate when your sales are likely to drop, then ensure you’ve
    put cash aside to cover your expenses during the lean months.

No matter what your company’s situation may be, the overriding advice from finance professionals is to seek help from those who know. If you don’t think you can manage your company’s cash flow yourself, hire a professional who can handle your cash flow needs. And, remember, cash flow isn’t about crunching numbers, it’s about managing your company so that you won’t find yourself in a cash crunch.

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