Cash flow management is where the current financial position, future performance and sustainability of a business all converge. It’s also the area that ‘exposes the rocks when the tide goes out, or put another way, it’s where the accumulation of problems throughout the rest of the business manifest into. Be sure to take cues from monthly actual v’s budget variance reporting, that feed back into strategy and forecasting. If there is cashflow pain headed your way, there should already be warning lights flashing.
Making sure you have got enough cash to meet your obligations as and when they fall due a legal requirement, under the corporation’s act, not just a nice to have.
Creditors need to be paid, bank loans and leasing companies need to be repaid. You also have a lifestyle that you need cashflow to support, a house, car, medical expenses, holidays and expenses for raising your kids like school and extra curriculum activities. And you need to be re-investing back into the capabilities of the business, in equipment, marketing, staff training and innovation. You cannot do that without cash.
Cashflow management is essentially an exercise in planning and prioritising, balancing essential v’s discretionary spending and we look to smooth out the peaks and troughs as best we can. Typically, the main components of working capital that need to be managed to have an efficient cashflow are accounts receivable, accounts payable, inventory (or WIP) and cash management. Sometimes managing cashflow can be like having a knife to the throat, whilst other times it can be like being stuck between a rock and a hard place. Some companies find themselves scratching around to pay bills as and when they fall due, but this can lead to reputation damage.
Businesses can be profitable, but still have a knife to their throat in terms of cash flow. It all depends on where the cash goes after you make it. Hefty capital repayments for loans or buying equipment can leave companies short of cash. How this plays out in practice reflects on the amount of working capital required to maintain daily operations. Good managers get by on the minimum amount of working capital by coordinating and forecasting accurately, which frees up more capital for other purposes. They do not need to have a safety net of liquid assets, just in case. With a good manager, there will be no surprises. They will not wait until the day you run out of cash before they say anything. A good cash flow manager needs to be across the detail and react quickly to changing dynamics, knowing when things are happening and not ever doubling up or planning to receive money that has already been collected.
An analogy for managing cashflow that most people would understand is that it is a little bit like driving a car. You need to be constantly adjusting to the conditions, being aware of how fast you’re going, what’s on the road just in front on you, whilst continually scanning further out into the distance, looking for hazards, to give ample time to react. The same sort of long-range and short-range scanning is needed in cashflow management also.
The best tip I ever got was “Always anticipate and have a back-up plan, don’t be scared to ask for a favour – but never ask for a favour unless you know when you can repay it”.
Cashflow is one of the 5-Pillars of ‘Profit Metrics’. The ‘Profit Metrics’ method embeds reliability and predictability into business finances. It allows owners to anticipate, evaluate and navigate. It enables them to get out in front of the business, be strategic and boost their bottom line. Nobody can predict THE future, but the alternative is to simply not do it and have no visibility or predictability, like driving a car blindfolded.
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