Wednesday, June 2, 2010

5 Principles to Managing Cash Flow Successfully

Managing cash flow is a simple concept – but hard to do it successfully in practice. Why? Business is dynamic and balancing the timing of unpredictable revenue against the predictable consumption of cash by fixed expenses coupled with unpredictable variable expenses can create a cash flow crisis. An easy solution is to just borrow more money (sound familiar – US Gov?) but that only provides a short-term solution to what might be a chronic problem of reigning in expenses to the revenue that your business is producing.

I have outlined 5 basic principles that can help you establish good business practices that will allow you to keep abreast of your cash flow position and enable you to take necessary action and managed your cash successfully.
  1. Revenue/Expense Budget: Develop a budget that time phases your cash (expense) needs. This may need to be down to the day (i.e. cash for payroll) and not just bucketed by month. This then helps you determine how much revenue you need to sell and then collect payment on in time to make payments. Review your budget with other business professionals to get their feedback as to its believability. Their initial comments may hurt but your still working on paper and not spending money. Stress your plan for corner conditions (low sales, unexpected expenses, delays in receivables) and understand how your budget may or may not respond under those conditions.
  2. Collection of Receivables: The critical element in managing cash is to understand what collection obstacles may occur that would delay the arrival of cash to pay for necessary expenses. A common mistake is not recognizing that a (valuable) client may choose at their discretion to extend and delay payment. Having an effective collection process that is prepared to contact clients “prior” to the payment date to make sure that the client organization is scheduled to make payment and that nothing is amiss. Do not let this become a conflict avoidance issue. Remember you are in business and the collection process, done professionally, can be painless – most of the time!
  3. Importance of No: Too often we are hungry for business or excited about a new client and make allowances, become too aggressive in pricing or scheduling a project, or committing to a poorly defined project. The end result is that you devalue the value that you offer the customer. What you rationalize as a good concession at the time to get the order makes it a costly product/project to deliver. Because of the over commitment you consume opportunity and delivery time on a low margin piece of business that may end up becoming a collection problem when other business was available that would have come in with full margin and paid on time.
  4. Negotiate Expenses: A number one priority is to minimize your expenses by effective purchasing. When you need something in your business remember that there are all kinds of ways of purchasing it – at different prices. Online auction sites can be very effective in reducing the cost of a business item by over half the local street price. Used equipment is also a great way to conserve cash. That approach may be a problem for you or a few of your employees using something that is refurbished or shows signs of wear but still has a useful life left but it protects cash. Tough negotiating on recurring costs (rent, advertising, etc.) is basic to containing cost and relieving pressure on cash flow.
  5. Cash Flow Dashboard: Doing all of the above does not get you to a point where you are through. Managing cash flow is a daily discipline. How severe your cash flow situation is determines the intensity in which you monitor key performance indicators (KPI’s) or metrics. If you are in good shape then it may be as simple as monitoring incoming orders, shipments and deposits. If you are on a roller coaster then you may need to include watching each receivable, bank balance, when you pay payroll (even yourself), what your payable situation is, etc. Keep a dashboard active so that you can always dial it up or down when you need it. Creating it during a crisis is not easy to do.
I have listed 5 principles to managing cash flow successfully. These steps are tactical measures that require solid execution. Bottom line is your basic cash attitude toward managing your business.
  • Good attitude: Keep your spending inline with your actual revenue and don’t spend assuming you will get the revenue.
  • Dangerous attitude: Convincing yourself that by spending more the revenue will come.
You may feel “crippled” by a tight spend/cash policy but that is an easier problem to handle than when you are over extended with no way to meet your financial obligations. Many successful individuals and companies started out using an austere money management approach and made it work for them. Make it work for you!

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