Cash flow is king, get a handle on your company’s finances

My thanks this month to well known Vistage (TEC) speakers Ron Fleisher and John Zaepfel for their useful insights on the subject of cash flow.

It’s probably fair to say that monthly or weekly cash flow statements don’t exactly make for the most exciting nighttime reading for the typical small company CEO. But after the income statement and balance sheet, this report is perhaps the most important of all.

We’ve all heard that “cash is king.” Running out of cash with nowhere to go spells the end to a business, regardless of how small or large.

A cash flow report should very simply tell you how much cash you have coming in and how much you have going out. It covers three distinct areas:

  1. Operating cash flow. This statement indicates the amount of cash being disbursed to vendors, employees, debt payments (including rent) and taxes, offset by the inflow of cash from customers and short- or long-term investments.
  2. Investment cash flow. Business owners or managers make short- and long-term investments from time to time.
  3. Financing cash flow. This is cash used to finance the business, including the cost of leases for equipment.

These three statements in aggregate determine a firm’s overall cash flow.

The benefits of tracking

The experts recommend tracking cash flow over time because it’s a key indicator of the health of your business. A chart comparing this year’s cash flow with last year’s, month by month, will quickly expose negative trends.

Tracking does something else for you. It automatically adjusts for seasonal and industry trends. If you spot any other unfavorable trends, that’s a signal to start tracking cash flow much more frequently, such as daily. Specifically:

  • As an anchor point, always review cash flow monthly.
  • Look at your checkbook daily. Note the receipts and note the disbursements.
  • Document the cash you have on hand and calculate how long it will last if receipts stop coming in, for any reason.
  • Determine your working capital needs (current assets minus current liabilities) for the balance of the year, at minimum.

Undercapitalized businesses are always struggling to support a healthy cash flow business operating environment.

The problems exacerbate when the company experiences a spurt in growth or an unexpected slowdown. A mandate for every CEO is to constantly search for ways to improve the capital strength of the business. Not doing this may be the kiss of death.

Ways to improve cash flow

Let’s review some of the things you can do to improve cash flow. In TEC, these ideas have produced good results over the years:

  1. Ask your bank to set up a “sweep” account for you. This is a bank account that automatically transfers amounts that exceed (or fall short of) a certain level into a higher interest earning investment option at the close of each business day. Commonly, the excess cash is swept into money market funds. The “sweep,” per se, varies from one bank to the next, but it’s a good way to get your hands on your cash sooner than later.
  2. Go nuts over your receivables. Give your best customers discounts for quick payment of 10 days or less. Consider credit card payments, but only if the total cost to the credit card company justifies it.
  3. If you carry inventories, do a physical inventory on them at least twice a year–quarterly if you know you have high inventory carrying costs. There’s nothing worse for your cash flow than low inventory turns, especially in-process inventories. With today’s technology, there’s no excuse for outmoded products sitting on the shelf. GPS has ushered in a whole new dimension of control.
  4. When cash flow is tight, negotiate with your vendors for discounts or extended terms. That’s a must. This isn’t an issue of nickel or diming them. It’s asking them to do for you what you do for your better customers.
  5. Renegotiate. Long-term agreements, especially leases, are always subject to re-negotiation. Again, the objective is to increase your cash flow.
  6. Use pay-for-performance. This is probably the most popular alternative that our TEC members have instituted in the last seven years. Perform first, get paid second. But set the bar so that the pay reward is worth shooting for. It can be tied to bonus incentives, profit sharing plans and even deferred compensation plans for senior execs.

Conserving cash seems like such a mundane chore, doesn’t it? Pure growth is so much more fun.

Spending with absolutely no concern for the consequences seems to be the providence of the U.S. government. The rest of us out here, who play by the rules, need to heed the rules of cash.

Until next month, please remember: cash remains king!

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