Cash is King, long live the King

flusso di cassa

The most effective business killer of both start-up and well-established businesses is running out of money.

Here I'm going to discuss some ideas on how to manage cash-flow in the best possible way.

Late payments have a tremendous effect on cash-flow: to understand this effect look at the chart proposed by Vito Mazza.

If your client is delinquent on 10.000,00 Euro and your business generates a 5% net profit, you need to acquire and perform additional 200.000,00 Euro sales to compensate this credit.

There are several dimensions of the problem to explore; I propose some ideas.

Your managerial behavior:

Late payments from clients drive late payments to suppliers, employees, consultants, and tax fines, etc., forcing the search for loans that might even not be granted, and low scoring in financial reliability databases; the most dramatic consequence is bankruptcy.

In this post cash is not only cash flow, how much money is coming into the business, and at what time and in what amounts, but also cash reserves, assets that can be easily converted into cash (liquid assets) and credit facilities which are potential sources of cash.

  • Maintain your marketing budget, get creative and resist the temptation to make counterproductive savings
  • Identify growth opportunities and pursue them
  • Define and monitor suitable KPIs, manage accordingly
  • Build-up recurring revenues, a stream of predictable income that, unlike one-off sales, can be counted on to occur at predictable intervals with a high level of certainty
  • “I’m convinced that about half of what separates successful entrepreneurs from the non-successful ones is pure perseverance.” (Steve Jobs)
  • “That’s been one of my mantras - focus and simplicity. Simple can be harder than complex; you have to work hard to get your thinking clean to make it simple” (Steve Jobs)
  • An old say: Turnover is vanity, profit is sanity, but cash is reality!
  • Remember: even the best product can’t compensate for the lack of cash-flow.

Your financial management:

  • Build-up cash reserves (saving account) during fat times so you can use it during lean times;
  • Develop a budget and stick with it;
  • Have the accounting software kept updated that includes cash flow forecast, and check the cash-flow at least once a week;
  • Get regular credit reports on your clients;
  • Use a predictive approach to cash flow, including risk analysis: consider uncertainty and do not rely on fixed numbers;
  • Identify in advance cash-flow shortfalls and take corrective action, and get a bank overdraft and use it only when strictly needed;
  • Don’t just make money, manage it: cash management has two elements, cash flow and cash holdings which is cash on hand (operating cash) and cash reserves.
  • Respect your partners: pay bills on time.

Your business relationship with your clients:

  • Agree on clear payment terms with clients, including interests on late payments;
  • Ask for advance payments if it’s customary in your industry: positive cash flow is highly desirable;
  • Deliver the invoice as soon as due, with all required attachments: do not give an excuse to delay the payment;
  • Set-up regular touchpoints: solicit overdue payments and escalate if the delay is beyond your threshold.
  • Consider the involvement of lawyers or collection agencies.
  • Always look for customers who pay on time and free from late-payers.

Allan C. Kay, a visionary computer scientist who has worked with Apple, HP, Xerox, and Disney once said “The best way to predict the future is to invent it. This is the century in which you can be proactive about the future; you don’t have to be reactive.”

Anticipating your cash flow needs well into the future can help with making critical decisions. This action reveals whether you are managing your business, or letting it manage you. Once you have a picture of your cash flow months into the future, you can have confidence knowing that you’re prepared.

My references

Ottorino Maggiore van Beest

20097 San Donato Milanese MI - Italy

VAT 10640770961


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