Managing Cash Flow

Cash — The #1 Priority

The cash flow statement represents the third of the “big three” financial documents. According to Vistage speaker Ron Fleisher, most CEOs pay far too little attention to this document, usually turning to it after the income statement and balance sheet, if at all. Such an approach, however, may put your business at risk.

“In business, cash is king,” asserts Fleisher. “If you run out of cash, the game is over. For that reason, you must attend to cash flow at all times. Unfortunately, most CEOs spend very little time looking at the cash flow statement. Instead, they usually dive right into the P&L to see how sales and revenues are doing. The P&L is an important document, but it only gives you a historical recording of what happened over a period of time. The cash flow statement tells you where you are now and whether you will live or not. For that reason, I strongly suggest looking at it before you review the P&L or the balance sheet.”It’s like coming to the scene of an accident. Suppose you’re a medic and you arrive to find a patient with a dislocated shoulder, a broken leg and nose, and a severed artery. What would you treat first? The artery, of course. Otherwise the patient could die. You need to treat cash flow the same way because it represents the blood flowing through your company’s veins. But most CEOs treat the broken nose (sales) because it’s sitting in the middle of the face.”

Reading the Cash Flow Statement

According to Vistage speaker John Zaepfel, the cash flow statement measures two vital indicators — how much cash you have coming in and how much is going out. It is typically broken down into three categories:

  • Operating cash flow tracks the operational activities of the business that either use cash or generate it. It includes cash outflow to suppliers, employees, interest and taxes as well as cash inflow from customer receipts and interest dividends.
  • Investing cash flow tracks discretionary investments made by management.
  • Financing cash flow tracks cash activities having to do with financing the business.

Added together, these three categories determine the company’s overall cash flow. Like the balance sheet and P&L, the cash flow statement typically comes out once a month. However, both Fleisher and Zaepfel recommend going one step further and tracking cash on a daily basis, especially for companies having cash flow problems. To keep close tabs on your cash flow, say our experts:

  • Review the cash flow statement once a month.
  • Look at your receipts and disbursements on a daily basis.
  • Know how much cash you have in hand and how long it would last if the money suddenly stopped coming in.
  • Know how much working capital you will need for the next one, three and five years.

“It’s okay to look at the cash flow statement once a month as long as you track receipts and disbursements every day,” says Fleisher. “It only takes two minutes to review this information, but it will immediately raise red flags or put your mind at ease.”

While watching the daily cash flow is essential for survival, Zaepfel also warns against overlooking the long term.

“As companies grow, three things tend to happen,” he explains. “You outgrow your people, you outrun your system and you outrun your cash. You can fix the first two, but running out of cash will put you out of business. Unless you understand how much cash you will need to grow the business and plan accordingly, you may one day face insolvency when you least expect it.

“Most entrepreneurial companies are undercapitalized as they go through the growth curve. That’s okay in a good market, but it creates all kinds of problems when the market turns down. For that reason, you need to keep looking for capital and make sure your company is properly capitalized at all times.”

Strategies to Improve Cash Flow

To improve cash flow, Zaepfel and Fleisher recommend the following:
  • Collect your receivables on time. Keep in mind that cash is not cash until it’s cash. Receivables are not cash; they are working capital tied up in receivables.
    • Find out which day of the month your client companies cut their checks. Make sure your invoice gets there before that date, not after.
    • Have your controller or CFO give you a weekly report indicating the top three outstanding accounts that have the most money past due. Work together to develop an action plan to get the money.
    • Create an accounts receivable “Ten Most Wanted List” that includes the ten biggest accounts that aren’t paying on time. Make it a personal mission to collect on them.
    • Eliminate any flaws in your invoicing and billing systems. Invoicing mistakes are a major cause for late payments.
    • Negotiate performance-based incentives with your customers rather than giving immediate price concessions to speed up payment. If they buy a certain amount and agree to pay within 30 days, then they get a price break.

If you’re not collecting your receivables on time, find out why and make the necessary changes. Never settle for mediocre performance in this area.

  • Negotiate better terms for your payables. The more time you have to pay, the longer you can stretch your working capital. However, cautions Fleisher, negotiate cost first and then ask for extended dating.
  • Inventory. Strive to increase inventory turnover. Inventory equals cash sitting on the shelf.
  • Focus on your sales mix. If you sell more high margin items, you will have more cash after paying expenses. Look for ways to increase incremental sales. If you can leverage more sales over existing costs, you will make more money and have more cash.
  • Use performance-based compensation. Pay people after they get the results, not before.
  • If it looks like layoffs are necessary, talk it over with your Vistage group sooner rather than later. It may be better to cut quickly and deeply to assure survival.

“Above all, constantly project your cash flow needs,” adds Zaepfel. “It’s not enough just to know how much is coming in and going out on a daily basis. You also have to know how much you will need tomorrow and where to get it. Otherwise, there may be no tomorrow for your business.”

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