To effectively manage cash flow, you must work it in advance. It can’t be done strictly as a day-to-day reaction to what has already happened. Business leaders need to know what is likely to happen before it happens; if not, they may inadvertently steer the organization into financial crisis.
Because the circumstances inside and outside your organization are dynamic, your process for managing cash must also be dynamic. Most large organizations know this and have systems in place to stay on top of cash flow, but many small businesses and social sector organizations have not taken the time to do the same. It’s really quite simple to do, requiring little more than a simple spreadsheet and 1-2 hours of time each week. With this, you can have a rolling 3-4 week cash flow forecast, which provides the owner and management team with the visibility necessary to make informed decisions. This forecast should then be worked into a quarterly and annual cash flow forecast.
We recently got a nice plug from The Shoestring MBA regarding our recently launched online course about cash flow management, entitled “Cash Rules for Entrepreneurs.” With permission from author Bill McGuinness, we adapted some of his material from his book Cash Rules, added some practical tips and tools from our experience as ActionCFO advisors, and put together an online tool that we think will be very useful to business owners and CEOs of small and midsize companies.
You can access this tool at www.cashrulesforentrepreneurs.com. For a very reasonable fee, you get lifetime access to an audiovisual presentation, podcast, booklet, and helpful review sheets. If you’ve been looking for a crash course (or just a quick review) of fundamental financial management concepts for your business, I think you will find great value in this tool.
Please be free with your feedback on it. As we hear back from people, we can continue to improve the tool in the future.
The first metric type in the list from the last post was leading indicators. Since these metrics provide advance alerts for decision makers, we commonly refer to them as “smart numbers.” Smart numbers should be viewed on daily – or at least weekly – basis. Some organizations even monitor smart numbers on an hourly basis.
To help you in choosing smart numbers, here are a few general types I have seen in my work as an advisor:
Revenue forecast. For some businesses, this is based on factors like time of week/month/year, traffic volume, general economic attitude, etc. For others, it is a view of the revenue
pipeline – a cumulative view of upcoming work. For example, it may be the dollar value of bids won and bids sold for a given period.
Effectiveness of delivering on value proposition. Every business has a value proposition. You should have a smart number that measures your effectiveness in delivering on that promise to the market. For example, if your business has a guarantee or return policy, track how many times you have to honor that guarantee, which can be converted to the dollar value of damages
related to missing on your promise.
Cash position or availability. Availability factors in cash-in-hand as well as cash available from a line of credit. This may also take also take the form of modified working capital availability (total cash and receivables less payables).
Measure of your base economic unit of value. Every business has a base economic unit of value such as a billable hour or unit produced. How many units have you produced and how many do you project to produce over a given time period?
I have noticed a recent increase in entrepreneurs with start-up ideas and financers who are willing to support them. This fits a pattern I have noticed for a long time: when the pain of a recession peaks, new ideas for solving existing consumer and business problems begin to take root. Although this means new competition for established businesses and products, it’s also an encouraging sign for the future.
When advising startups, I stress the importance of making sure the new venture is a business and not just an idea or product. The three elements of a business are often described as the legs of a stool; the business won’t stand without all three being strong. The business must be able to (1) sell a product/service, (2) produce the product/service, and (3) manage its financial activity.
It’s the last one on which I would like to focus. As the business climate improves, smart business leaders will shift their focus from survival to business expansion. They will see opportunities to increase sales. What they often don’t see is the impact on cash flow from increased sales and new hiring. It seems counterintuitive, but cash flow is toughest when sales are rebounding. Failure to understand this can destroy a business. If the cash gets spent faster than it’s collected, the business runs out of fuel. When the fuel runs out, the business sputters and sometimes is forced into bankruptcy.
If your business has cut back on financial management during the recession, it is critical for you to be focused on financial management as the business begins to grow again. Don’t let one leg of the stool cause your downfall just when a more forgiving business climate may be approaching.
During the 1930s, 1940s, and early 1950s, my grandpa and his brother built and exited a number of different business ventures. They began by helping their dad with his cattle business and launched into a full-scale dairy operation. (I have a photo circa 1930s of a delivery van with “Schrock Dairy” and “Natural Milk & Cream” written in fancy lettering across the sides and back.) From there, they launched a full-scale apple orchard business. Then, with the full-gut commitment unique to entrepreneurs, they tore down all of their orchards and started a hybrid seed corn growing business. They later added a fertilizer (anhydrous ammonia) business with multiple plants and distribution facilities across Illinois, Indiana, and Ohio. This business was eventually sold to Standard Oil of Indiana. (I guess anhydrous ammonia was the rage those days.)
Today, we are more than a half-century removed from these entrepreneurs, so naturally, we have different business concerns than they did, right? My dad was recently reading through their correspondence and found two consistent themes:
Get the right people in the right positions.
Cash flow! Cash, Cash, Cash. It was never far from their minds.
OK, so maybe business really isn’t much different today! The key issues facing entrepreneurs 75 years ago are the same for entrepreneurs today, and they will still be the same 75 years from now.
Renewable energy is the rage these days. It reminds me of the 1970s energy crisis. At that time, my parents installed a large solar collector in our side yard which connected to our central air HVAC system. It operated for many years, but it was eventually scrapped. My dad tells me it never paid for itself; it was a bad investment (even after the tax credit)!
Unfortunately, many of today’s proposed renewable energy solutions may end up facing the same end as that old solar collector – the scrap yard. Your business, however, has a legitimate source of renewable energy. Do you know what that is?
It is cash flow from operations.
Cash flow from operations is simply the cash flow generated by your basic business operations. This could be from manufacturing and selling a product, delivering a service, or buying products and merchandising them somehow. If you can do this at a profit, the operating margin provides operating cash flow – a legitimate self-sustaining (renewable) source of cash for your business.
Welcome to the new ActionCFO blog, a collection of insights from certified ActionCFO advisors related to increasing financial visibility and control in midsize businesses.
The need for strategic financial management is not unique to our struggling economy. It’s necessary for businesses to thrive in good times and bad. Unfortunately, many companies do not do it well. Some recognize this, hire a controller or CFO, and assume that it’s being done better. But is it? How can you know?
Are you nervous about seeing financial statements each month? Are your financial statements routinely late? Have you ever been blind-sided by a cash shortage? Do you know what’s on the financial horizon for your company? These are the things that make business owners nervous, but they don’t have to cause worry for you. The disciplines of financial visibility and control are easy to learn, and frankly, not that difficult (or expensive) to manage.
As CFO advisors, we enjoy helping companies perform better in this important area. That’s why we’ve created this blog – to share thoughts and insights with you as they arise in our work. Whether you’re a business owner, a CFO advisor, or just someone who wants to better understand the disciplines of financial visibility and control, we hope you find value in our entries.
And please be free with your questions and comments. We are learning, too!
