Cash flow: stop juggling and start managing!

by Kate on February 12, 2011

JugglerCash flow is affected when you sell or buy something, change a process, make a spending or investment decision, or change a project deadline.

People right across a business make decisions each day that affect cash flow, yet the focus of those outside the accounting department is often on sales, profit and costs rather than on cash.

But a business can be profitable (or can appear profitable) yet have significant cash flow problems. More sales and a bigger business can make cash flow worse, not better. It’s also possible to underestimate a profit problem because there is cash in the bank account … at least today!

In the short term, cash flow difficulties can be eased by juggling payments, adjusting stock levels and chasing outstanding accounts. However, reduced access to funds and the cost of borrowing is driving attention to proactive cash management and the structural aspects of cash flow.

It takes thinking and effort to find and plug cash flow holes rather than just get busy with short-term fixes. The effort pays off, though, since stronger cash flow means a more sustainable business and less need for outside finance for working capital.

To get the cash flowing faster you’ll want to take a look at how practices for inventory management, customer acquisition and management and production or operations management, since it’s in these areas that cause the cash to get stuck.

It’s important also to take a look at profit, since a cash flow problem can exist because there’s not enough profit to cover loan and creditor repayments, tax and dividends – or because owner/director remuneration is beyond what the business can afford.

If you’re looking beyond day-to-day tactics to understand and improve cash flow, here are some questions to consider:

  • Is operating profit sufficient to cover interest, tax, loan repayments and dividends?
  • How long does it take to turn money invested in stock and operations to a sale and then cash? How can you shorten that cycle?
  • Where does the cash to fund purchases and expenses come from? How much is from the bank and investors and how much is generated from operations?
  • Does your team understand how their actions affect cash flow – and are decisions made with cash in mind?
  • Is cash flow planning part of your financial routine?

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