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Running Out of Cash – The Heart Attack that Could Kill Your Business

Posted on 25/06/2012, 09:42

If cash is king as the business saying goes, then the power behind the throne is CashFlow. Some people lose sight of what business is all about… the reality check is business is about creating cash for yourself and the business.

Knowing when you are getting funds in and when you can pay them out again is Cash Flow management.

Are you aware of your Cash Flow? The flow of income and costs through the business at any time and the conjunction of the two.

            It has been said that a lack of sales in a business is like a cancer – it will kill you over time – but a lack of Cash Flow is like a heart attack; it will kill you immediately.

Are you driving your business financially? We find in many cases business owners feel controlled by their businesses. Many business leaders don’t have a finance background, they tend to be entrepreneurs and technical people and may not have a deep appreciation of Cash Flow. The unfortunate reality is that as a leader you can delegate the task but not the responsibility and without proper financial measurements and controls your business will struggle if Cash Flow ever gets tight, as it will invariably do on many occasions.

Cash Flow speed bumps do happen, no matter how much you plan or how well prepared you are they will always happen. However the financial Cash Flow controls Pro-actions help you to put in place mean that you will be infinitely more prepared to deal with them and have your business survive through the harder times.

So what is a Cash Flow? It’s knowing what your bank account looks like today, tomorrow and onwards – really owning the banking rather than abdicating it to your bank manager. The bank manager will have several customers they are dealing with – and however good they are they will not have your passion for your business. Cash Flow is the lifeblood of any business.

Why is it important? Quite simply not having the cash to pay bills can bring down your business. Not collecting in the cash will mean you don’t have it available to pay what you owe. So if your invoicing is slow, or your customers don’t pay you on time your Cash Flow will be badly affected.

How often do I need to look at it? We suggest Cash Flow is plotted for the next Quarter so it forms part of your business strategy. It should be reviewed and managed Daily so you are controlling it and not being a slave to Cash Flow. Your actions should be reviewed Weekly so that mishaps and those speed bumps can be ironed out and planned for.

Cash Flow Management means acting with a huge degree of realism. As a bank manager I saw many Cash Flow projections that were always positive and always had a year end profit of, well let’s just say, unrealistic expectations on many occasions. Cash Flow means including negative projections. Cash Flow needs to be constantly worked upon, as the aim is to always improve the position.

We suggest Cash Flow is built up from the budget and looking back at trends. Management of Cash Flow will inevitably bring about actions each and every day based on the cash needs of the business, which will naturally evolve as time moves on. Cash Flow enables you to look well ahead, and for the bank account will help you manage within your facilities.

Just because the bank balance is good doesn’t mean the future cash position will be. Planning a Cash Flow is vital to success and survival. You need to know when to pay those creditors, and whether your debtors are meeting your agreed invoicing terms.

At Pro-actions we have experienced Business Improvement Specialists who are knowledgeable about Cash Flow. We can help you build a Cash Flow management system. We can work with you to improve your Cash Flow.

So we can define Cash Flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of Cash Flow can be used for calculating other parameters that give information on a company’s value and situation. Cash Flow can be used, for example, for calculating parameters to determine a project’s rate of return or value. The time of Cash Flows into and out of projects are used as inputs in financial models such as internal rate of return and net present value.

We can use Cash Flow to determine problems with a business’s liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable.

Cash Flow can be seen as an alternative measure of a business’s profits when it is believed that accrual accounting concepts do not represent economic realities. For example, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares or raising additional debt finance.

Cash Flow can be used to evaluate the ‘quality’ of income generated by accrual accounting. When net income is composed of large non-cash items it is considered low quality. Cash Flow can be used to evaluate the risks within a financial product, e.g. matching cash requirements, evaluating default risk, re-investment requirements, etc.

Clearly having a full understanding and a management of your Cash Flow is a vital business tool.


Mick Sims
Business Improvement Specialist

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