Focus on cash flow, not just profits..

What defines a successful business in turbulent economic times? Many would equalize success to a number of factors, a cliched one being high profits and rightfully so. However, it is vital to understand that profit is only realized when actual cash flows from the attributed transaction, or in layman’s words when the transaction materializes. Others would credit success to the successful running of the 5 key factors of an organization i.e. Strategic focus, People, Operations, Marketing and Finance, the all-inclusive formula and, again, rightfully so. Then, where does cash flow management belong?

Extending far down from the surface of the 5 key factors, we must appreciate that the gear that links all these factors is a well-ordered cash flow. History has it that poor cash flow management has led to the unfortunate liquidation of gigantic businesses and a recent U.S Bank Study showed that 82% of business failures are due to poor cash flow management.

In this article, we will talk about what causes cash flow problems and what can be done to ensure a well-ordered cash flow.

What causes cash flow problems?

Losses, low profits, over investment, poor debt collection policies, tall spending, unrealistic targets, uncontrolled growth and poor planning of finances.

Solutions

For any new venture, the formative years prove to be strenuous, from setting up to the execution of operations and management of finances. What can be done to avoid walking into a wall?

1. Budget, budget, budget. Ensure the budget is realistic and not idealistic. Most businesses develop budgets based on an ideal scenario. However, it is imperative to engage in developing a budget that represents facts and not just assumptions, though assumptions can be used in certain scenarios, as long as it does not deviate substantially. How can one have a realistic budget? This is made possible by analyzing past expenses and income and reviewing the current contracts in place. Quarterly budgets prove to be more efficient and reliable. Review budget to actual every quarter and update numbers accordingly.
2. Develop a strict debt collection policy. Further to this, manage your billings & indirect taxes such as VAT.
3. Negotiate supplier terms with your suppliers.
4. Cash flow analysis – Prioritize payments e.g. taxes, salaries, office rent and running expenses. Quarterly cash flow analysis proves to be a more pragmatic approach than an annual one. Always ensure that the final total does not result in a deficiency. Maintaining a cash reserve is crucial, and it is, after all, the main purpose of managing cash flows. If there is a deficiency, take action, make amends and re-prioritize payments and debt collection.
5. Finally, incorporate the cash flow analysis into the budget and note how expenses, income and cash flow are all connected to one another.
6. Controlled growth of the business.

A successful business is one that can manage its cash flows successfully as cash flow is the gear that links all the 5 facets of an organization.

In our next article, we will speak on the controlled growth of businesses.

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