Executive Summary
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Cash is the oxygen of a business: it must have cash in order to operate.
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Cash flow management entails measuring cash coming in (receivables) and cash going out (payables).
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It’s not uncommon for smaller businesses to need a line of credit to bridge the gap between receivables and payables—but this facility comes at a cost.
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Many cash flow issues are due more to inattention or sloppy management than to problems with customers. Nonetheless, it’s important for managers to know who they are doing business with, and customers need to know the terms of any sales transactions.
Introduction
In late summer 2008, a Californian company that helped businesses to cut their power consumption costs, BluePoint Energy, found itself in very hot water. BluePoint’s CEO, Guy Archbold, had stated a year earlier that the company would soon lock down contracts to bring in more than US$50 million in revenue. However, this didn’t happen. And when newspapers reported that Archbold had been suspended, they also reported that the company had lost US$14.3 million on sales of only US$1.3 million. The story ended unhappily for all involved, and there are many management lessons that could be learned from it—with the importance of cash flow management at the top of the list. A 2008 survey by Discover Financial Services showed that some 44% of small-business owners said they had experienced cash flow problems.1 In a tough economy, that number is assuredly higher. What can a manager do?
Master Day-to-Day Financial Metrics
Every business needs a budget that allocates income and outgoings in well-defined categories. The best budget system is based on the history of the business, i.e. a detailed listing of where money was earned and spent in the past; but, essentially, what a manager is trying to do is pin down (on at least a quarterly basis) his yearly receivables, and from whom and where, and his yearly expenditures. Then, against that budget, the manager should track business operations to see whether budget projections are turning out to be reality. It’s important for a manager to account for every dollar that comes into the business and every dollar that goes out. And, in a pinch, he needs to know where the business is, against budget, right now.
Track and Forecast Receivables
The part of any budget that is most critical, of course, is the cash coming in—not the cash that might possibly come in (projected or booked business), but the cash for which a business has performed work, or for which it has a contract with a firm payment schedule. Yet here too, the tieback to a budget is quite important: Every manager needs to know (based on past experience as well as future plans) when he can reasonably expect those dollars to be in the mailbox or, better, electronically transferred to a business bank account. Thus, managers need to know on a weekly (some say daily) basis whether the to-date income projected is actually in hand. If it is, a manager can then start to disburse payments (salaries, supplier invoices, and so forth); if the business is running short of income, a manager needs to take other forms of action (as will be discussed later).
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