Cash Flow Management: Being Unconventional

Cash Flow Management: Being Unconventional

Getting good advice on how to implement cash flow management practices can be complicated. Improvements to cash flow management are available for all aspects of your business. The tricky part is figuring out what to start with and what practices aren’t worth the time and effort for your business.

The biggest challenge is that some cash management ideas can actually put you in a worse cash position than when you started.

Conventional Wisdom Isn’t Always Wise

You could start today by implementing some easy things that would give your business quick additional cash. But which easy ideas should you implement? More important, are they right for your business?

I’ve found articles written on each of these ideas. The authors would have you believe that each idea should be implemented by every business. Some examples I have seen,

  • Start charging everything you can to a credit card. It will give you on average about 30 days to send your cash to the credit card company and not be charged any interest.
  • Pay all of your bills 29 days after they are due and before the next billing cycle.
  • Sell more of anything and everything that you can.
  • Make sure all invoices are sent out to your clients the minute you can. Don’t wait a second.
  • Fire someone that isn’t meeting expectations, so you can save money.

Each “fix” recommended above has potential downfalls.

  • If you charge goods on a credit card, do you have the discipline to pay off the balance in full every month? If you don’t, it will have a negative impact on your personal and/or business credit rating. It will also cost you additional cash paying off the interest charges.
  • Some of your bills may carry late fees and interest if they are not paid by a certain date. That will cost your business more in the long run. Possibly even worse than this additional cost is paying late may damage an important relationship with a key supplier.
  • Depending on your business model, selling more can make your cash position worse. This depends on when you receive cash for the sale vs. when the sale is recorded and when you need to pay any expenses related to the sale.
  • Sending invoices only gives you the illusion of doing something to get paid faster. It doesn’t help you today. Most businesses receive the cash 30 days or more after the invoice date. This is true even if the bill is sent days, or weeks, after the invoice date.
  • Firing someone may cost you money, and a lot of it. Recruiting Costs to fill the position. Severance pay. Vacation pay. Unemployment. In some states you need to find cause and have the documentation to prove a problem in case there is a lawsuit. Firing should be a last resort.

Why Good Cash Management Advice is Hard to Find

Cash Flow Management: Being Unconventional

There are literally thousands of articles written about cash management, cash flow, increasing the cash in your business, raising money, lowing your taxes, and of course, the ever infamous “how to hide your cash in an offshore account.”

There are a few reasons that you need to be cautious about reading a cash management advice column and following the advice blindly:

Hidden Motives: When I look at articles about cash management it becomes obvious the author has an agenda. The articles are generally “thin” – they talk about 4-6 aspects of cash management and have a specific emphasis on one particular way to improve your cash position. Then I read the bio of the person who wrote the article. It becomes obvious they, or their company, have a particular area of expertise they would like to sell to the reader.

Narrow Focus: Other articles focus on improving the effectiveness of a specific aspect of your business, such as inventory management, product development, or sales. What they don’t mention is the impact of cash on your business. The articles are written to indicate that if you implement what they are “selling,” then your business will be better off. Period. No questions asked. The problem is that narrow-focused improvements in your business often either require a permanent capital infusion or a temporary outlay of cash. Either option may be difficult for your business to absorb.

Business Silos: Cash management solutions that address a single aspect of a business are common. An expert looks at one piece of your business to optimize only that one area. If you focus on optimizing that one piece, it may not optimize your cash flow for the entire business.

Why It’s Tough Figuring Out Where to Start Implementing Cash Management in Your Business

People who read my articles and talk to me about cash management sometimes want to move too quickly. Generally, their problem isn’t what they think it is (see my article “Keep Digging. The Problem with Your Cash Flow Isn’t What You Think It Is.”)

I always advise people to take a systematic approach. This way, the cause of the problems often become visible and you can create a list of issues to address. You may also discover that you don’t have the information you need to identify, or fix your challenges, and simply having information is the place you need to start.

Here is the basic structure I use to implement a solid cash management program in any company:

  1. Put your bookkeeping in order.
  2. Analyze your financial reports.
  3. Do quick fixes.
  4. Implement bigger projects.
  5. Create a cash flow forecast.
  6. Use cash management tools.
  7. Monitor a cash management dashboard.

Implementing solid cash management can take a few days of focused effort or can be implemented over a period of months. It depends on the urgency of getting more cash into the business and the size and complexity of the company.

Here are a couple resources that will help you understand and forecast your cash flow more effectively:

CFO.University’s Cash Velocity Calculator is simple tool that highlights where your working capital is being invested.

To create your cash forecast this article and tool included in it can be a big help. Why Every Business Should Build Weekly Cash Flow Forecasts.

If you have any questions regarding these 7 steps or the tools included above, contact me.

Where do you start and how can you do this?

My next article will go into detail for each of the seven steps to implementing a sound cash management program. If you want to get started, start with identifying improvements that should be made in your bookkeeping and financial records. Many companies are not ready for the other steps, so make sure that your business is.

If you’re not sure about your bookkeeping, find a great firm that specializes in accurate bookkeeping and ask them to take a look. They will probably spend 30-60 minutes with you at no charge, which is more than enough for them to understand your situation. Then you can decide how much trouble you’re in and if you need help, or not, with bookkeeping and financial records.

Bonus Suggestion: Your bookkeeper or accountant should be able to explain everything to you in plain English. You should basically understand everything, even if you don’t know the details. Knowing how to do bookkeeping and finances is required. Being able to communicate with you clearly is the real value of a good bookkeeping/accounting firm.

Unconventional Wisdom: Spend Your Cash Quickly

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