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The
How to Keep the Cash Flowing
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Cash -- The #1
Priority
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Reading the Cash Flow
Statement
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Strategies to Improve
Cash Flow
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Additional Resources
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:
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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.
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Investing cash flow
tracks
discretionary investments made by management.
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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:
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Review the cash flow
statement once a month.
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Look at your receipts
and disbursements on a daily basis.
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Know how much cash
you have in hand and how long it would last if the money suddenly stopped
coming in.
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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:
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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.
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Find out which day
of the month your client companies cut their checks. Make sure your
invoice gets there before that date, not after.
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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.
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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.
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Eliminate any flaws
in your invoicing and billing systems. Invoicing mistakes are a major
cause for late payments.
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Consider a policy
requiring an up-front deposit. A number of Vistage companies are
surprised to find that customers will agree to this as a matter of
course.
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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.
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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.
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Inventory.
Strive to increase inventory turnover. Inventory equals cash sitting on
the shelf.
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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.
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Use performance-based
compensation.
Pay people after they get the results, not before.
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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."
Created for Vistage View. Copyright 2002, Vistage, Inc.
All rights reserved.
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