Cash Flow or Bust!

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The recent furore over large companies asking to reschedule debt repayments has once again highlighted the issue of cash flow, and how important it is to even the largest businesses.

The companies are not really bankrupt – in one recent example, a company with debts of an estimated $60 Billion has these amply covered by an asset portfolio which, even in these depressed times, is reckoned to be worth around $100 Billion. Why, then, is it trying to put back the payment of some $3.5 Billion due this month?

The simple answer is that it doesn’t have the free cash available… Business plans were built on an expectation of a certain level of trading – primarily in property sales – which simply dried up with the global economic crisis. Without the sales, the company quickly found itself running short of cash and so unable to service upcoming debt repayments. Unlike governments around the world, of course, a company can’t simply print more money to get it out of a hole (an unwise move for governments that seldom seems to stop them, though!). In the absence of being able to improve its sales to generate cash, it must either borrow more money to repay old debts, or delay the repayment of those debts. And this is what the company in question is now trying to do.

The fact is that many more businesses fail through cash flow problems than for all other reasons combined – an estimated 80% of failures, in fact!

So how do companies get out of looming cash-flow crises?

The answers, of course, vary enormously with the type of business, but a few general items cover the vast majority of situations:

  • Boost sales – this is the most common response, and can be helpful. However one needs to ensure that it is not a case of delaying the inevitable: that sales are not done at such low [special] margins that the business cannot cover even basic costs. Reducing profitability for a short period to get extra sales can help cash flow, but reducing it to a point of significant loss is potential suicide.
  • Manage Inventory– this is a more complicated area and one not fully appreciated by many businesses. One needs to not only reduce inventories to a level appropriate to the business and lead times, but also to manage the ordering process to stop islands of excess building up (look at weekly sales, instead of monthly, and you’d be surprised how the picture can change, for example).  Reducing inventory by 3-4 days is like putting an extra 1% on the bottom line, and lower stock means lower payments which helps your cash flow, so systems should be in place to ensure stock doesn’t age, and that ordering is appropriate to the business run rate.
  • Reduce Receivables – another potentially complex area that is often neglected in the interests of “keeping customers happy.” If you are known as a soft touch, then your customers will stretch your payment terms to pay those that are more demanding (or financially beneficial). Instead of sending a month-end statement and hoping the money will roll in, send it at the beginning of the month and have credit controllers call your customers before mid-month (when they’re quiet anyway) to ask about any possible queries on the statement. Simply removing these queries proactively will reduce your DSO noticeably in most cases. Of course, there are many other techniques, too.
  • Reassign Assets – although this might not help a short-term cash flow issue, managing your assets properly can help prevent cash flow problems. Do you really need to own your Head Office, or is it an ego thing? Do your vehicles, or IT systems, need to be owned or can you lease them? In many cases you’ll find that the benefits of leasing or renting are significant in terms of cash flow and they have tax benefits, too.

All of these issues can play a significant role in helping you manage cash flow better, and there are more, besides, depending on the nature of your business.

The real point, though, is to run your business in such a way as to avoid getting into this sort of trouble in the first place – cash flow problems can literally put even the most profitable company out of business.

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4 responses to “Cash Flow or Bust!

  1. Dear Guy,

    I appreciate the views and ideas you have posted. It is of help to small sized organisations and consulting firms. I am forwarding the link of this article to fellow enterprenuers in India.

    Thank you!

    Shubhendu

    • Thanks for your comments, Shubhendu. I’m happy for you to send the link to others and hope they can benefit from this.

  2. thank you for this excellent article I wish everyone read min 2 times to understand how to mange his/her cash flow … I am loosing my friends and leaving the country for this issue not able to manage their cash flow either business owner or employees .. thank you again … Samar

    • Thanks for your kind comments, Samar. I’m pleased you enjoyed the post – feel free to reblog and/or circulate it.

      The importance of cash-flow is so often underestimated, while people focus on revenue (ego!) and theoretical profitability – profits that can only be realised if the cash-flow is there to support the business.

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