Sharpening the “cash flow tool”

Last month we had a look at the sales pipeline while we were down in the workshop. I made the point that it was a critical tool to enable you to run your business.

Well here we are again down there and I am looking at a tool that will kill your business if you don’t sharpen it and keep it sharp.

The problem

I remember when I was at Apple that every month we seemed to have one of our resellers in a meeting with our finance people and sales as well, and we were trying to help them save their business.

Always, the problem was “managing cash flow”. Most of them had no system or if they had one it was pretty poor and very rarely used. Needless to say a rusty tool can really cause you some problems. In this case … death of the business.

Cash flow – what is it?

You see “managing cash flow” is the function of the business which controls the “money coming into the business and the money leaving the business”.

Why am I saying this? You know this. However, you would be amazed at how many small to medium businesses do not do a good job in this area.

Cash is described as the lifeblood of the business. It is a detailed forecast of expected cash receipts, payments and cash balances over a planning period.

This process underpins the ability to know what is coming and to prepare for it. It enables action to be taken before problems arise.

Without cash you don’t have a business, it’s that simple! If a company has insufficient cash or access to funds, it will go out of business.

A lack of understanding of cash position and forecasting ability probably means there is a lack of understanding of the business itself.

Cash flow is very much related to the sales pipeline and this is beautifully put in the expression – no clients … no cash.

Forecasting

When you have an effective “cash flow” system, among other things, it enables you to forecast what will happen to the business when things change. You can then take actions that will enable you to get through the crises which may arise when certain things occur, such as –

• When your customers slow down their payments to you.

• When the price of fuel goes through the roof, as we are seeing now.

• When your sales team is having difficulty closing sales due to their clients delaying their purchasing decisions.

• When you are growing too fast and cash liquidity starts to become a problem.

• When you can’t get enough stock on time … and so on.

So, how do you go about sharpening this particular tool “cash flow”? A system is required.

First of all you do need to have a system. Even a basic system on Excel will do the trick, even though you can get a lot more sophisticated.

• You need to know what your revenues will be by week (possibly) and by month (definitely).

• You then need to list and fill in your expected expenses to match them weekly and monthly.

• You will have a lot of fixed expenses and some variable expenses that will need to be on your spreadsheet.

• All these figures will need to extend down to total revenue minus total expense for each period to give you a profit or loss figure.

Now that you have your cash flow spreadsheet you can begin to play with it by varying some of the figures and then seeing what that does to the operating cash.In this way, you are able to assess the requirements for cash, given various scenarios.
Sensitivity analysis

This testing reveals the responsiveness of profitability and cash flow to changes in some of the spreadsheet variables. For example, what happens when:

• There is an unforseen 10 percent change in procurement costs.

• There is a drop of five percent in productivity.

• Sales volume drops by say 10 percent.

• A sales person unexpectedly resigns and there is a delay in replacing them, and training them until they get to full effectiveness.

• There is a variation in interest rates.

From these scenarios you are then able to put appropriate actions into place to ensure you have sufficient life blood to enable your business to grow as you have planned.

Making it happen

You know, really managing cash flow, I think, is just one of those things that requires a little bit of focus in each aspect of the tool. Those aspects are –

• Making operational profits.

• Controlling growth and funding it.

• Effectively managing capital expenditure.

• Managing stock levels.

• Managing receivables.

• Managing payables.

• Controlling borrowings and interest costs.

• Making the most of “idle” cash.

• Optimising your tax situation.

Let’s look at a couple of the more important of these.

Managing receivables

This one is a biggy and we are going to see a lot more emphasis on this in the near future as things get more difficult.

Companies are going to try to hang onto their cash for longer. When they do that your methods of getting what is owed to you will need to be very good. Some of the things that you will need to do will be –

• Invoicing on time and correctly.

• Following up to make sure they have received the invoice.

• Talking to the client to make sure you are on the payment list.

• Getting a commitment as to when they will pay.

• At the first sign of non-payment having a meeting with the client to resolve the issue. If they are not paying there is always a problem somewhere.Remember – any receivable more than 90 days outstanding is almost unrecoverable

The regular review of the statistic “day’s sales outstanding – DSO” will help you to keep a check on how you are doing in this aspect of cash flow management.

Managing payables

In the same way your customers may be holding back on paying you, you may elect to delay payment to your creditors so you can have enough cash to run the business.

You need to be very careful in how much you do this as you still need their services and products in order for your business to survive and grow.

However, if you are going to really manage this area well, you will need to:

• Communicate with your vendors and distributors so they don’t put you on credit hold.

• Pay all the small ones and then you need only to focus on the big ones.

• Take advantage of early payment offers if you have the cash to do so.

• Prioritise your payments – focusing on these things will ensure your payables are under control and giving you any advantage that is available.

• Managing stock – basically, get rid of it, fast.

• Controlling borrowings and interest – continue to look at the funding of your business to see how you can get a better deal. There is always a better deal.

• Idle cash – make sure it is invested well. Eg., on overnight money markets so you get a good return and you can always get it back when you want it.

Well, this “cash flow” tool is one heck of a tool, with many aspects to it.

It sounds like a simple one, but as we have seen here, it is quite a complex one and to keep it sharp takes a lot of continual work, constant “what if scenarios”, and constant evaluation of stock, receivables and payables.
I hear you say you do not have the time.

I say to you that this is your business life that we are talking about. Get into it and make sure you are the one to be able to say …”we are on top of our cash situation at all times”.

Remember cash is the lifeblood of the business. You have got to keep an eye on it at all times.

If you would like to have some help sharpening your cash flow, contact Barry at barry.freeman@quantify.com.au.
For more information on Quantify Corporation go to www.quantify.com.au.