5 Strategies to Successful Cash Flow Management
By John Reddish
How can you predict, avoid and/or, minimize the impact of a cash emergency? Managing
cash flow is every manager's challenge, every day, every year. Those managers who
keep a close eye on their daily activity and emerging industry trends can help reduce
their company’s exposure to the chill of a cash crunch. In an increasingly competitive
world, you need to be alert.
How can you predict, avoid and/or, minimize the impact of a cash emergency? First,
pay attention when any cash shortages arise. When cash gets short, pay close attention
and be prepared to act. Questions to be answered include:
1. What caused the problem? Pre-payments to take advantage of special discounts
can reduce cash. Transportation strikes, for example, could delay shipments and
therefore payments. An industry (or economy) slowdown will often result in customers
stretching out their payables.
2. How can you cope? If cash on hand is not robust, let the special discounts go.
It’s usually more cost-effective to pass on a discount than to borrow to overcome
a shortfall. Keep up on the news. If you hear about any threatened strikes and/or
disruptions to your supply chain, make sure you have a back-up position. Even if
temporarily more expensive, it can save your business by showing your customers
your reliability and versatility in challenging times. If your customers are in
industries facing hard economic times, keep closer tabs on your credit policies
and be active in collections. If necessary, tighten credit terms, but use discretion.
Being firm but supportive to your customers will go a long way in keeping them in
the fold while still giving you a better cash flow. Defer purchases and/or negotiate
extended payments if cash gets short.
Most importantly, document both the signals of problems and your solutions.
way, if the signals happen again, you can refer to prior successful action as a
first possible solution.
Imagine possible, but normally unpredictable cash flow challenges. Some problems
can’t be anticipated, so “what if” scenarios can be created. You don't have to get
elaborate, but you can ask what would happen if there were a flood, or, as we've
experienced more recently, a devastating hurricane. What then? Other problems, such
as "product sabotage" can only be dealt with as they occur. Constructing possible
scenarios to reduce risks associated with “unforeseeable” problems is an important
management tool. Learn from, and document, each experience, or you may have to repeat
Second, watch sales. Any prolonged (and "prolonged" computes differently for each
company and industry) drop in sales without a comparable -- and simultaneously emerging
-- reduction in expenses is a prescription for trouble. Of course, there is at usually
some lag between sales changes and a compensating contraction in expenses, but early
diagnosis can reduce the negative impacts significantly. Once a changing trend has
been identified, act promptly or the impact of the lag will be more severe.
Third, review the budget. If short-term borrowing is regularly needed to meet normal
operating costs, the unavailability of such loans or a sudden change in operating
expense could be devastating.
If ongoing operations cannot be supported by sales, either more sales are needed,
fewer expenses must be incurred or a combination of the two is in order. While this
sounds very simple, all too many companies hesitate "in hopeful anticipation".
If remedies are not introduced on a timely basis, a severe cash crunch could follow.
Fourth, keep a close eye on new product development. In many companies, R&D
expenditures for new products are often allowed far greater variance from projected
budgets than normal expenditures. After all, when you create something new, it is
really hard to accurately predict costs -- or turnaround time -- at the outset.
Failure to keep these costs, and time commitments, within bounds or monitor their
continuing impact and cost/benefit can lead to continued funding of projects well
beyond when they should be cut off. Overall cash flow can be easily drained into
a seemingly bottomless pit, and often an entire company is jeopardized by one errant
Fifth, beware of pet projects. A pet project is any organizational activity undertaken
for ego value rather than consistency with the organization's mission and profit
targets. Pet projects, whether new ventures or ongoing cost/profit centers, can
often lead to cash flow problems. All organizations have pet projects from time
to time. Failure to recognize and deal with a pet project when a cash crunch looms
has been the death knell for many companies.
Many cash flow challenges have such simple origins. Often it’s simply a matter of
days, or weeks and they can creep up on you. And the daily grind can cloud your
vision, encourages false hope or distract you just long enough for problems to take
hold. You can learn from past and/or current cash shortages. You can be watchful
that sales, budget and R&D costs stay in line. You can keep a lid on pet projects.
In an increasingly competitive world, you need to be alert.
John Reddish works with and speaks to entrepreneurs and top executives who want
to master growth, transition and succession, helping them to get results faster,
less painfully and in ways that work for them. Author, speaker, consultant and mentor,
John is a member of the National Speakers Assn.