In our first newsletter, we saw how every business can achieve long-term benefits by having, and keeping central, a meaningful vision. This month we look at something more short-term but also applicable to every business: cash.

 

Accounts usually mean a profit and loss account and balance sheet with comparatives and notes. A third financial statement is not legally required for most Small Medium Enterprise's, and therefore is generally not produced. The cash flow statement is generally seen as of lower value since SME's keep a much closer eye on their cash (mainly through the bank account) than almost anything else.

 

There is far too much to say about cash for one article, and not all of it will apply as much to one business as it does to another. This article just touches on the main points. An analysis of the various factors identifying your cash flow - and what can be done to improve it - could well take two or three days of serious effort. But done well, you could solve your cash issues - if, of course, you follow through on the plan YOU come up with for YOUR business.

 

Cash flow (the flow of cash into and out of a business over time) is the lifeblood of a business. More businesses fail because of poor cash flow than because of poor profit. Watching the cash inflows and outflows is one of the major planning and management tasks of an owner.

 

Income and expenditure cash flows rarely coincide BUT you must always be in a position to meet your scheduled payments. This means there can be times when you could simply NOT have enough ready cash to meet your commitments. Cash flow management is basically about speeding up the inflows and slowing down the outflows.

 

The outflow of cash is measured by such things as cheques written every month to pay salaries, suppliers, and creditors. The inflows are the cash received from customers, lenders, and investors.

 

Improving cash flow will put the firm in a stronger cash position to support business activities and future growth opportunities. To improve cash flow, review different funding options for the business, assess whether the sales leads-to-cash received cycle could be improved, take steps to better manage the supply chain and then implement a monitoring system to ensure proper management of these initiatives.

 

First, you need to review how your business objectives are currently funded. This assumes you have clear objectives for your business, which follows on from last month's "vision".

 

Then look at ways to shorten the sales lead to cash cycle. In "The Balance Sheet Barrier" John Cleese showed the effect of poorly planned sales producing a profit while simultaneously driving the business broke. The sale is not complete until payment is received. Increasing sales isn't automatically a good thing.

 

The other side of the equation is reducing costs or negotiating better payment terms. Of course, there's so much to this - purchasing in larger organisations tends to be looked after by a team similar to the sales team.

 

You need to work on the drivers of your cash flow, such as receivables, suppliers, inventory, assets, costs, trading pattern and trading volume. Determine what needs to be monitored in your business (your Key Performance Indicators). Input actuals and compare them to your plan, either monthly or some other period suitable to your business. Identify where they vary from the plan and take corrective action as needed.

 

As with everything, if this initial work is to carry on effectively into the future, you need to implement a monitoring system. Watching what's in the bank might (or might not) be satisfying - but it doesn't tell you much. Better to have KPI's covering a few key issues identified as controlling your cash in and cash out. Specifically what they are will vary from business to business.