Cash flow is the lifeblood of an operating business. Unfortunately, many entrepreneurs never learn about cash flow – and the differences that exist between cash flow, booking revenues and paper profit. Cash flow is the fuel that allows your business to continue operating and, more importantly, achieve growth. By managing cash flow effectively, you can achieve significant gains over competitors.
Here are 7 tips for managing cash flow that you can institute right now.
1. Cash FLOW not Cash. You need to be clear that cash flow is not the same as your bank balance. Think about the components of cash flow and realize that your bank account is just one of those components. If you analyze a cash flow statement, it starts with the opening cash balance, accounts for the effects of operations (as well as capital expenditures and financings) and results in an ending cash balance. Your bank account balance is simply the beginning cash balance line for the forward looking period you want to review. A healthy bank balance can be quickly compromised by difficulties in operations.
2. Review Receivables. Managing cash flow starts with your balance sheet. Your cash flow can be actively improved by managing your accounts receivable. Without compromising your customer relationships, you should aggressively collect outstanding amounts due. Be sure you are taking action to insure prompt payment. Invoice promptly, be sure payment due dates are prominent and send overdue notices immediately. When necessary, use collection services. Not only will this improve your cash flow, but also it may result in early collections of amounts that otherwise would become uncollected write-downs. This is also a good time to review your customers’ payment and credit histories. Weed out those customers that consistently do not generate profit for you. Flag those customers that have a history of slow payment, and change your policy regarding them accordingly.
3. Initiate Inventory Analysis. Managing cash flow includes your hard assets. You should examine your inventory (if your business uses goods). Institute active inventory reduction campaigns, including “purging” idled or surplus inventory. By selling off underutilized (or unused) inventory, even at a discount, you unlock the cash value in an asset that has remained dormant.
4. Discover Discounts. In addition to managing cash flow via receivables and inventory, you can search for opportunities to reduce your projected cash outflows. One of the best ways to do this is by finding vendors or creditors that will offer you discounts. Many vendors, particularly in the current economic climate, will offer a discount for prompt payment. If you get creative, you may find other discounts available for various reasons, such as buying near the end of a quarterly period, purchasing in bulk or bundles, etc. Even if you don’t receive discounts, try and get more liberal payment terms from you vendors.
5. Push Payables. The liability side of your balance sheet plays a role in managing cash flow, as well. Essentially, your core strategy is to bring cash into the company as rapidly as possible and wait as long as possible before paying cash out of the company. One strategy in that regard is “pushing out your payables.” Simply put, take as long as you are allowed to pay your company’s bills – without incurring late charges or interest costs. Of course, you need to be sure you don’t enrage key suppliers. Also, bad credit can smother a business, so be certain you manage your credit effectively when employing this strategy.
6. Produce Projections. As with so many things in business (and life), if you don’t have a roadmap to where you’re going, you’re unlikely to get there. Managing cash flow is no different. Once you’ve built an operating business, you need to have a sense of what the cash flow profile should look like. The best way to do this is via regular cash flow projections. The particulars of your business will dictate how often you produce these (weekly, monthly, quarterly), but the more often the better. You should be analyzing these cash flow projections in conjunction with your key personnel. The purpose, of course, is to determine where variances occur, why they occur and then adjust accordingly.
7. Know The Numbers. I’ve worked with more than 100 businesses in my career, and one paradox always remains: “business” is the same, but every business is different. What I mean by this is that you can apply certain general techniques to any business (cash flow management tools for example), but that each business is a unique entity with differentiated characteristics. When it comes to managing cash flow, this means that you are the best judge of key metrics and KPI’s in your business. You should be able to identify 2-3 foundation elements that provide critical “health” information to you. Perhaps it’s units shipped, or total sales calls, or conversion of customer inquiries, etc. You should identify these components, determine the key threshold numbers for them (on a weekly or monthly basis) and then be sure that reports are produced that allow you to gauge progress and take appropriate actions.
OK, so the title of this post is 7 Tips for Managing Cash Flow and there are 8 items…don’t worry my counting skills haven’t entirely degraded yet. This last one is a bonus that has more to do with business approach than active cash flow management.
8. Reach for Recurring Revenue. The simple fact is that in addition to the management tools I’ve referenced, cash flow starts with revenues. If you’re not selling, there is nothing to collect and no cash to manage. For this reason, you should seek out any opportunity to create annuity income streams. If you are able to produce $X of revenue simply by opening the doors and turning on the lights (or ideally while your doors are locked and the lights are off for the evening), then your business will be on a more solid foundation (and managing cash flow becomes an even easier process).
What are your experiences with managing cash flow?
Have any of you encountered difficulties when using any of these techniques?
Are there other cash flow management tips you would suggest?