Small Business Leaders HeadsUp! | Cash Flow Management Strategies that Actually Work | Extraordinary Business

27

Dec
2016
Comments Off on Cash Flow Management Strategies that Actually Work | Extraordinary Business

Cash Flow Management Strategies that Actually Work | Extraordinary Business

cash flow

Every business owner needs to monitor his company’s cash flow very closely. In large organizations, this task is usually delegated to the CFO. Even if there is an entire department handling a company’s cash resources, it is essential for the CEO to remain directly involved in this activity.

Why should the CEO spend time on a routine matter like cash management?

Business enterprises can survive the loss of a major customer or market or the resignation of key employees. They may even manage to continue operations for several years without reporting any profit. But if a firm runs out of cash, its very survival would be threatened.

It is impossible to run a business firm without having the cash to pay salaries and to purchase supplies and raw materials.

What can a firm do to ensure that it always has access to an adequate supply of cash?

Understand the concept of free cash flow

Every business needs to keep track of the amount of cash that it has left over after meeting all its obligations. “Free cash flow” (FCF) is a measure of a firm’s financial performance and is calculated by deducting capital expenditures from its operating cash flow.

In an article titled Are You Growing Your Business Into The Ground? – 5 Ways To Increase Cash Flow, author Michael Evans points out that FCF is the sum that a business enterprise has left over to pay investors after meeting all its needs.

Profit is not the same as cash flow

Many company owners fall into the trap of thinking that high profits translate into healthy cash flows. Unfortunately, this is simply not true. In fact, booking higher profits could actually have the opposite result and lead to a depletion of your cash balance.

If your profits emanate from credit sales, you would need to incur all the expenses required to make that sale. Buying raw materials, producing goods, and shipping the consignment to your customer would drain your cash balance. You would realize your money only when the client actually pays.

A report in Inc.com quotes Philip Campbell, a CPA and a former CFO, as saying that merely selling goods does not lead to cash generation, “… collecting the money on that invoice is what creates cash.”

A natural calamity can affect your cash flow

Extreme weather conditions or a flood in your area can halt production or damage your equipment. You may experience a drastic fall in demand for your products. In such circumstances, it is necessary that you have access to emergency cash or to a line of credit.

Writing in the Harvard Business Review, Benjamin Collier explains that small businesses are often unprepared for natural disasters. In a survey carried out in the aftermath of Hurricane Sandy, it was discovered that a large number of businesses were uninsured or did not have appropriate coverage.

The firms that had access to credit were able to raise cash and restart operations. The study found that the number of companies which applied for credit was greater than the number that received insurance payments. A business’s survival depended upon its ability to raise cash.

Cash is king

A company that keeps a close tab on its cash generation and usage is more likely to prosper than one which ignores this crucial task. Keeping a sharp eye on your cash flows and planning for your future cash needs well in advance is vital to a firm’s long-term success.

Ravinder Kapur is a business operations writer at Aepiphanni, a small business operations and strategy consultancy that exists to help small business owners CREATE | DESIGN | BUILD extraordinary businesses. He is a commerce graduate and a fellow member of the Institute of Chartered Accountants of India. He has been affiliated with various interests in the financial services industry for more than 30 years. His finance expertise includes the commercial vehicle, automotive, and construction equipment sectors, as well as corporate finance. His experience in these disciplines has included business development, credit analysis, risk management and financial recovery. In addition, he worked extensively in corporate finance recoveries and was involved in several large value arbitration cases.

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