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!

Win-Win Banking Relationships

Having a positive working relationship with your banking institution is critical in a turbulent economy. Having a good understanding of your banks lending policy is a given but there are additional factors that come into play when a loan is necessary. Factors that can make this process a Win-Win situation are: Honesty is at the top of the list. Fundamental to any lending relationship is trust. Whether lending hedge clippers to a neighbor or money to a customer, the lender needs to trust that the borrower will return the property / money in good order. If honesty is # 1, “no surprises” is a close second. Money was lent based on a set of circumstances. If these facts change, the lender needs to be kept informed in advance if possible. Consider the neighbor who says; “your hedge clippers? I can’t get it to you this weekend; my brother-in-law in Ohio has it. I am sure he will bring it along when he comes back to visit.” Good Surprises will not always be viewed as positive. “If management can miss what was happening by that much, could they also miss it in the other direction?” Keep in mind that every lender reports to someone who is generally less informed about your company. Even the bank President reports to a Board and to the Regulators.Keeping them informed protects them within their organization. Have a plan and do what you say. Being consistently overly optimistic will eventually compromise the trust relationship. Pay attention to the covenants in the loan agreement. Making payments on time is only part of what was agreed to. These covenants are in place to help the bank maintain its fiduciary responsibility to their depositors. Think how you would feel if your mother was the widow mentioned above. Be realistic on how you view rates. Think about how you respond to your low margin customers. Do you want your lender thinking about you in this way? Remember, a quarter point on a $250,000 loan costs an extra $625 per year. Compare that to the cost of being viewed as an unprofitable account. View the relationship as long-term. Consider the banks other services (home mortgages, investments, cash management, etc) if they can add value. If you are satisfied with your bank, refer them to others. In other words, increase your value to your bank. If the bank invites you to a social event. Go! Getting to know each other in a relaxed environment can often lead to better understanding. Reciprocate when possible. If you get in a tough cash bind, make sure you pay your payroll taxes. Without getting into a legal discussion, unpaid withholding taxes can jeopardize the lenders secured position. This is never a good thing. These are good points for us as banking customers to keep in mind as we managed our relationship with our respective banks. Bankers can also foster better bank / customer relationships that we should look for (and expect) in determining if a banking relationship should begin or continue. Listen! Be consistent. If things are changing on your end of the relationship, remember the “no surprise rule”. Know your customer. Understand their business. Be aware of the challenges and opportunities. Serve as a resource. Introduce the company to successful new ideas or services. You see a broad cross section of the marketplace that your customer may not be aware of. Most banks today have a catchy slogan. “They are all good”. Live your slogan. Take the mystery out of your lending process. Recommend your other services only when they can add real value. If the value isn’t clear, remember the “trust relationship”. About rates, be fair. You deserve to make a profit, but again remember the trust relationship. Introduce the customer to your back up person. It’s never positive if that introduction happens in a transition meeting. Keep the client’s interest in mind on the depository side of the relationship not just the borrowing side. “No, but have you considered…” is often a better answer. A banking relationship is an important and invaluable asset which both sides need to invest time and energy to manage well. Don't just invest in it when you need it! Click here for the complete article from Lauber & Company.

Personal Guarantees and Your Business

Operating and growing a business often requires injections of cash to provide the working capital for expansion in staff, equipment, and market promotion campaign or to just get through a tight business climate and preserve essential resources. Depending upon your source for credit you may be asked to make a personal guarantee. Despite your confidence and enthusiasm in the ability of the business to bear the repayment of the loan and associated debt service consider the following 5 tips (see 5 Steps: A Personal Guarantee and Your Business (and Future ) to protect your self and your business. Know the risks. Understand what you will risk in the personal guarantee. For business partners, a new meaning to "one for all." Make sure that all partners share the same liability if the debt cannot be repaid. Beware the "clause" & effect. Know what the impact of changes or "flexible" alternatives to loan elements as such as determining interest rate over the term of the loan can have to you. Don't gloss over the fine print. Understand what the fine print says. Use a lawyer to interpret the legalize. You do not want a surprise if things go bad. You can't run. You can't hide. So don't! Bankers do not like surprises. Don't let them learn of a problem from someone else other than you. Don't let your bravado hide the true condition of your business. Be transparent on what you are doing if a problem situation and build their confidence in you. Borrow wisely and take the time to exhaustively determine what range of liabilities you are obligated to in your loan agreement.