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June, 2010

5 Principles to Managing Cash Flow Successfully

Managing cash flow is a simple concept – but hard to do it successfully in practice. Why? Business is dynamic and balancing the timing of unpredictable revenue against the predictable consumption of cash by fixed expenses coupled with unpredictable variable expenses can create a cash flow crisis. An easy solution is to just borrow more money (sound familiar – US Gov?) but that only provides a short-term solution to what might be a chronic problem of reigning in expenses to the revenue that your business is producing.

I have outlined 5 basic principles that can help you establish good business practices that will allow you to keep abreast of your cash flow position and enable you to take necessary action and managed your cash successfully.

  1. Revenue/Expense Budget: Develop a budget that time phases your cash (expense) needs. This may need to be down to the day (i.e. cash for payroll) and not just bucketed by month. This then helps you determine how much revenue you need to sell and then collect payment on in time to make payments. Review your budget with other business professionals to get their feedback as to its believability. Their initial comments may hurt but your still working on paper and not spending money. Stress your plan for corner conditions (low sales, unexpected expenses, delays in receivables) and understand how your budget may or may not respond under those conditions.

  2. Collection of Receivables: The critical element in managing cash is to understand what collection obstacles may occur that would delay the arrival of cash to pay for necessary expenses. A common mistake is not recognizing that a (valuable) client may choose at their discretion to extend and delay payment. Having an effective collection process that is prepared to contact clients “prior” to the payment date to make sure that the client organization is scheduled to make payment and that nothing is amiss. Do not let this become a conflict avoidance issue. Remember you are in business and the collection process, done professionally, can be painless – most of the time!

  3. Importance of No: Too often we are hungry for business or excited about a new client and make allowances, become too aggressive in pricing or scheduling a project, or committing to a poorly defined project. The end result is that you devalue the value that you offer the customer. What you rationalize as a good concession at the time to get the order makes it a costly product/project to deliver. Because of the over commitment you consume opportunity and delivery time on a low margin piece of business that may end up becoming a collection problem when other business was available that would have come in with full margin and paid on time.

  4. Negotiate Expenses: A number one priority is to minimize your expenses by effective purchasing. When you need something in your business remember that there are all kinds of ways of purchasing it – at different prices. Online auction sites can be very effective in reducing the cost of a business item by over half the local street price. Used equipment is also a great way to conserve cash. That approach may be a problem for you or a few of your employees using something that is refurbished or shows signs of wear but still has a useful life left but it protects cash. Tough negotiating on recurring costs (rent, advertising, etc.) is basic to containing cost and relieving pressure on cash flow.

  5. Cash Flow Dashboard: Doing all of the above does not get you to a point where you are through. Managing cash flow is a daily discipline. How severe your cash flow situation is determines the intensity in which you monitor key performance indicators (KPI’s) or metrics. If you are in good shape then it may be as simple as monitoring incoming orders, shipments and deposits. If you are on a roller coaster then you may need to include watching each receivable, bank balance, when you pay payroll (even yourself), what your payable situation is, etc. Keep a dashboard active so that you can always dial it up or down when you need it. Creating it during a crisis is not easy to do.

I have listed 5 principles to managing cash flow successfully. These steps are tactical measures that require solid execution. Bottom line is your basic cash attitude toward managing your business.

  • Good attitude: Keep your spending inline with your actual revenue and don’t spend assuming you will get the revenue.

  • Dangerous attitude: Convincing yourself that by spending more the revenue will come.

You may feel “crippled” by a tight spend/cash policy but that is an easier problem to handle than when you are over extended with no way to meet your financial obligations. Many successful individuals and companies started out using an austere money management approach and made it work for them. Make it work for you!

Mike Brice
Phone: (206)226-1617

Feature Article

Who Should Run The Family Business?

A recent Forbes article by Chris Carey addresses one of the age old problems of "Who Should Run The Family Business?" Be it a small business or a large one (like Ford) it is a challenge as to who should rise to the top job - family member or professional manager. The odds are heavily stacked against family-member executives and only a few become excellent leaders. However, it is always fearful when the family head passes as to who will sustain the culture and company performance. This was a concern for Wall-Mart when Sam Walton died but professional management has been able to move the company forward with consistent revenue growth and profitability.

Carey uses an example of how the son of the founder of a trucking company needed to be retooled to be successful. In assuming the CEO job the son tried to operate the company much like his father had but it was not a good match for the needs of thee company and his own strengths and weaknesses. Using an outsider (Carey) it was determined that the son was a best fit developing customer relationships and new business while others took over operational responsibilities.

Moving family members into the top job can be problematic. They may not have the right fit or passion for the job that the company needs. Children of founders may feel obligated to take on the senior responsibility and carry on the family name but this can put the perpetuation of the business and employment of many "faithful" employees at risk if the match is not a good fit. In selecting a family member evaluation should be made of the candidate and the company by an outsider to identify what is needed to be successful in the job and the attributes, interests and passion of the family member before a decision is made. Hopefully, this will occur in advance of an event that could rush a son or daughter into a job that they are not prepared for.

Management Resources

Mentoring: Mentoring uses the resources your company already has to improve employee satisfaction, develop leadership, and teach new skills. Here's how to start your company program.
How to Start a Mentoring Program

Team Management: When does a start-up become a real business? Different people answer that question in different ways. One definition—and a good one—is that a company has reached some level of maturity when its founder no longer relies exclusively on his or her own skills to manage the business.
How to Build Your Management Team

Personal Development: Doing too many things at once is like giving up ten IQ points—and a bunch of other scary stuff.
How to Stop Multitasking

Motivation & Employee Development: The recession is no excuse for ignoring, misusing, or demeaning talent. But hey, if that's what you really want to do, follow these suggestions
Five Ways to Ensure Mediocrity in Your Organization

Business Planning: It’s not the business plan itself that trips up entrepreneurs. It’s how those plans make entrepreneurs behave that causes trouble.
Go Ahead, Write a Killer Business Plan. Just Be Willing to Tear It Up

Scorecards: Harvard professors Robert Kaplan and David Norton developed the balanced scorecard to help translate vision and strategy into action. This technique can make strategic planning a core part of any business. They showed that financial analysis, which is largely a look backward over past performance, isn’t enough to guide long-term investment decisions. That information alone doesn’t demonstrate how an organization can create future value. The balanced scorecard uses a more holistic approach to analyzing how information is gathered and used to deal with investment decisions and other issues. In addition, it acknowledges the importance of input from customers, suppliers, and staff; as well as data concerning processes, technology, and innovation, to help organizations create a desired future.
Benefiting from the Balanced Scorecard

Mobile Technology: From processing credit card transactions to providing WiFi Internet access, your cell phone can be a lifeline for running a business outside the office
5 Mobile Apps to Make Running a Business Easier on the Go

Risk Taking: Smart risk taking has a place in leading your comapny. Consider three steps toward successful risk taking.
How to Take Risks at Work(2:53 min)

Innovation: Traditiona; brainstorming sessions can actually put a crimp in the original thought process. Corporate brainstorming is the enemy of innovation--whether that be the development of a life-changing commercial product, a new methodology that saves the company tons of money or a marketing plan that promises to draw in new clients from every conceivable demographic profile.
Brainstorming Might Hinder Great Ideas

Business & Blogging: A blog offers a business a chance to build a real community. Blogs make it easy and quick for people to post, comment, and update posts - making it easy for everyone to participate.
Why should my business have a blog?

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