A profit forecast may be aspirational but the cashflow forcast must be realistic, writes Simon Coyle.
Surviving Cash flow Problems
There is little doubt that a healthy cash flow is the lifeblood of every business. You may be voted one of the best companies to work for or have an award winning product but if you do not have enough cash to pay bills, you will not be in business very long. For most businesses, getting cash flow management right first time is business-critical. Running a business at full speed and neglecting the impact of cash is a fast track route to failure. While not every cash flow problem can be avoided, a large number can.
Assess the Extent of the Cash Flow Problem
Making an honest and thorough assessment of the extent of a cash flow problem is a crucial first step. If the business leaders believe that the cash flow situation has reached cash crisis point, then the business leaders should roll up their sleeves and get involved in detailed cash management. This may include allocating responsibility for following up debts, managing and providing reassurance to creditors, trying to source credit and proposing realistic new payment dates. Once the cash flow position stabilises, attention can then be given to the longer term changes that are required to ensure business sustainability into the future.
Preventing Cash Flow Problems
With profitable businesses it is easy to fall into the trap of neglecting cash requirements. Producing a monthly cash flow statement facilitates the ability to both maximise the returns on cash surpluses and helps to define an appropriate way of funding any cash flow deficits that may occur during the year. A profit forecast may well be aspirational, but the cash flow forecast must be realistic. Throughout the year the cash flow forecast should be kept up to date and should be amended for changing market conditions and any potential changes in customer circumstances and requirements.
Cash Management Performance Indicators
Including cash management performance indicators in bonus schemes is a good way to ensure staff retain a clear focus on cash. Customer non-payment is commonly caused by a customer’s dissatisfaction with the product or service. As many more staff are accountable for customer experience than for the sales process, it could be argued that the provision and knowledge of appropriate cash flow performance indicators is at least as important as sales and profit indicators.
Growing Businesses
Growing businesses can often experience a heavy cash burden. Every strategic decision made by your business has an impact on cash flow. Investing in new products, new markets and diversification are all legitimate corporate strategies however they must be carefully thought through to protect the health of the business. New ventures that entail a learning curve can be expensive and distracting to the business. In cash strapped times, any new ventures should be carefully considered and the associated cash flows should be carefully managed.
Managing Overheads
Reducing overheads is a popular method used by businesses to reduce their cash flow requirements. However while cutting overheads may be one solution to improving profits, this must be approached with care as this can actually cost a company money to implement in the short-term. For example, closing down a particular service line in a business may result in high redundancy costs. It is also important to reflect on the fact that a thorough overhead savings programme is one for which the benefits can be “once off” in nature.
The key to avoiding business critical cash flow problems is to acknowledge cash flow problems early and take appropriate action as soon as possible. Failing to acknowledge there is a cash flow problem or delaying addressing cash flow problems can be detrimental to the future survival of a business.