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How Much and When is Money Coming In, and How Much and When is it Going Out?

Cash Flow Management

By: Dr. William R. Osgood

Cash - the organization's most precious asset. Control your cash before it controls you.

Cash flow management is a problem for almost any firm, large or small. The worst symptom of the problem: the business runs out of cash. Watching a business floundering, running out of cash even as it makes great sales and profits is painful. Painful though it may be, it is common and repeatedly the cause of business failure.

Small businesses are especially vulnerable to cash flow problems since they frequently operate with inadequate cash reserves or none at all and, worse, tend to miss the implications of a negative cash flow until it's too late. However, even in larger organizations, the departmental or strategic business unit (SBU) budget is often as rigid - exceed your spending budget and you are out of business as well.

For financing purposes, cash flow projections are generally the most crucial aspect of the business plan. Bankers and other outside financing intermediaries will almost always look for a cash flow analysis in preference to any other financial statement, because this will show how the loan can be repaid. In larger companies, the cash budget for a new project or expansion is critical to the overall decision to commit funds and move forward. To view a Cash flow worksheet, select PDF or Excel format.

Why is cash flow so important? If the cash inflows exceed the cash outflows, the business can continue operations. If the cash outflows exceed the inflows, the business RUNS OUT OF CASH and grinds to a halt. Even if the imbalance is only for a short period, it can spell disaster.

In its simplest form, cash flow refers to the flows of cash, literally, into and out of the business. Think in terms of actual cash, dollar bills, flowing in and out of the business, and then identify both their sources and uses. This is cash-flow analysis.

TIMING and cash flow are inseparable. Payments to suppliers are typically expected often even before customers of the business pay their bills. As a result, the operation is very likely to have a negative cash flow when it grows dramatically. Periods of change are always reflected in an altered cash flow. If sales fall off, the cash flow slows down. Interestingly enough even if sales increase, the cash flow may stop completely or even become negative (more out than in). Think of the impact of credit sales on cash flow, for example. One-time events such as population shifts or changes in competition could trigger such consequences. More commonly, seasonal fluctuations of the business may also pose cash flow problems where a build-up of inventories must precede the sales cycle (such as a toy business prior to the Christmas holidays).

Whatever the cause, the underlying message is simple: Run out of cash and the business is in trouble. Even if it is possible to raise more money from other sources, sooner or later the timing of cash inflows must match the outflows if the business is to survive.

How to get cash flow under control? It's not easy. Some businesses never achieve cash flow control. These businesses are always in trouble, chronically overdrawn, slow in paying bills, and will eventually fold. They fold though, only after their owner/managers have spent a great deal of time worrying and probably spent all of their personal assets trying to cover the operating deficits. This kind of complication need not be an integral part of business management. Instead it is essential to PLAN and SCHEDULE so that cash flow for the business is positive.

Cash flow management does not need to be mysterious or complex. Managing cash is all about timing the inflows and outflows. Cash Flow Analysis starts the process. This can be as simple as going to your check book or accounting system and analyzing your receipts and disbursements over the past few months. A pattern is likely to emerge. What are the revenue sources, and how consistent are they from month to month? As well, what are the expenditures, and how repeatable are they from month to month? Next, look at the incoming revenue stream (Accounts Receivable) or your sales forecast to confirm and further predict cash inflows, and your Accounts Payables to build a pattern of required future disbursements. Match the two. Is there a positive or negative cash flow?

If there is a negative cash flow, the deficit needs to be covered from somewhere. There are two options. Spend less, or get more (increase revenues). Even it the cash flow is positive, inspecting the individual elements may further improve operations. Are there cash inflows or outflows that can be changed?

Cash inflows can be increased by adding new outside cash (usually a limited or one-time option) or, more commonly, by offering a discount for cash payments or for accelerated payments on regular accounts receivable (so-called "quick pays"). Another option for businesses normally offering open account credit (which become the Accounts Receivable), is to offer credit cards instead. Today, even many corporate customers, including many agencies of the federal government, utilize credit cards for purchases to eliminate much internal paper work for themselves.

Cash outflows can often be reduced and/or delayed. They can be reduced by eliminating certain costs (Do you really need a ?) They can frequently be delayed by negotiating or taking longer payment times than you have observed in the past. Many smaller businesses pay their monthly bills (their Accounts Payable) more quickly than they need to in an effort to maintain a good credit rating. The primary criterion here, however, is not necessarily how quickly you pay, but the consistency with which you pay. If you are inclined to pay bills at the end of the month in which they were received, instead, establish a policy to pay 30 or 40 days after receipt. You will automatically gain the equivalent of one to three weeks spending as a one-time improvement in your cash balances, and may be better able to align outflows (expenditures) with inflows (receipts).

Understand what your own cash flow cycle is. This process will take time and thought - otherwise it won't work. It is essential to take time to experiment with combinations of different alternatives. A controlled cash flow, the end result of this process, will more than repay the time and effort given to it. In fact, it may save the life of the business - and the future of the owner/managers as well.

Run your business - don't let it run you. This is COMMON SENSE.

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