How do I … manage cash-flow?
Context
This briefing assumes that, for whatever reason, you wish to improve your management of cash-flow.
Step 1: Cash really is king
Businesses fail for many different reasons. Bad businesses will always fail eventually. However, one of the key reasons good businesses fail is because they do not manage cashflow properly. This is one of the crimes of the business world - good businesses failing because the team didn’t use basic disciplines to manage cash. Why? Well, cash-flow problems in good businesses are manageable and, properly handled, potentially avoidable. At a price, that may seem high at the time but is much lower than going bust, cash-flow problems in good businesses are always soluble through forecast management.
Step 2: Three month rolling cash forecasts
Putting a simple rolling cash-flow forecast in place is easy. And the emphasis is on simple. Don’t over-elaborate or confuse yourself with complicated spreadsheets. You know your weekly / monthly / quarterly cash outgoings (salaries, rent, VAT, telephone, purchases …). You can also make reasonable estimates of your worst case cash collection on a weekly / monthly / quarterly basis. Putting these two together gives you a crude but effective forward cash-flow forecast that, because it’s worst case, you should aim to beat :opening cash balance plus weekly cash-in less weekly cash-out = closing week cash balance And to complete your cash picture, add a line at the bottom of your cash-flow forecast that shows what, if any, overdraft facility you have in place. With this added you can see, at a glance, how close you are to exceeding your facilities and/or requiring an increased facility.
Step 3: Re-forecast weekly
By looking at this forecast you’ll see, on a week-by-week basis, what cash you need. Revisit and re-forecast this three monthly cash flow each week in the light of the new information you have. By doing this you will have a forecast that provides you with early warning signals of potential problems ahead … which are only problems if you continue as you are and do nothing about them! It thus gives you the ammunition and motivation to take corrective actions and control your cash via a proactive strategy of managing your suppliers, your debtors and your providers of capital.
Step 4: Using the signals
Having this cash information is important but using it is essential - and potentially lifesaving! So act on the signals the numbers are giving you. If things look tight you can :o Control costs : as a manager of a business costs are the single item that you have absolute control over. You authorise the expenditure and/or sign the cheques. If it’s not absolutely necessary don’t incur it. If you need to cut costs do so. Collect cash : review your debtors and increase your efforts to collect overdue cash from customers. A customer is not a customer unless they pay for the goods and services you provide them with. Increase sales : focus on the specific actions that help you exceed your sales forecasts, and therefore cash collection. Speak to your bank : no-one likes bad surprises and that includes banks. If it’s likely that you’re going to need a facility in two months time speak with your manager now. It’ll show you’re in control and if it turns out that you don’t need it great! Review your suppliers : in terms of extended credit terms, reduced prices or changing to lower cost providers.
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Step 5: “Need To Do”
You need to: Forecast cash via a simple mechanism
Re-forecast every week Act on the signals Control costs and collect cash
Key Messages
If you only forecast one thing, forecast cash. Don’t become a good business that fails because it didn’t manage its cash. It’s great being rushed off your feet making sales and delivering products and services but if you don’t collect the cash then you’re wasting your time and being taken advantage of by your customers. Remember, real customers who value your services pay their bills!