As an intelligent, high performing business owner, you already know that “Cash is King” when it comes to running your business, right? Well, in my experience, too many business owners focus too much energy on Profit and Loss (P&L), and not enough on Cash. It should never come as a surprise that you are low on cash, and you should always be able to predict (within reason) your near-term cash position and have strategies to improve it if the plan puts you too short.
The first step is the one too many businesses skip, and that is having a budget based on cash flow, not just the P&L.
This means adding in all the things that you pay cash for that aren’t reflected in your P&L, the most common of which are bank loans and any regular (or irregular) draws you take to pay yourself. I’ve worked with businesses that showed tremendous profits but were going broke because they weren’t paying enough attention to the draws the owner was taking to pay personal bills at home. No matter how much he took out, his profits never suffered – it was like magic!
If you find yourself in a cash crunch, the time to act is NOW (really it was last month, but it’s too late for that), and the activities to focus on are those that can find and conserve cash now as well.
I recommend a 6-week cash flow plan that shows what you expect to bring into your business in cash each week and shows what you should be paying out to creditors, vendors, and employees each week. This will give you the true cash situation for the next 6 weeks and highlight when and where the shortfalls might be.
Now that you have a plan, you need to work on strategies for both areas – cash inflows and cash outflows.
If you are cash flow negative, you need to look at what bills can be delayed, which can be partially paid, and which truly must be paid (utilities to keep the building open, for example). If you are short cash, know your vendors, talk to them, tell them your situation and ask for their help. If you are a good customer of theirs, they understand the ups and downs and will likely work with you. Do not try to mislead them – that rarely goes well short term and really hurts you in the long term.
Once you have done what you can with your cash outflows, it is time to look at cash inflows.
We start with your accounts receivable – who owes you money, and when do you expect to be paid? Can we accelerate the payment schedule in some way? Who is overdue on their account, when was the last time they were called? Do everything you can to speed up the receipt of payments already owed to you.
The last thing to work on is increasing sales – and this is where you need to be strategic.
I was recently working with a company in a cash crunch, and the CEO went on a sales trip to try to drum up business. The only problem is that the prospects being called on the type of customers that will take months to get setup, will pay the slowest, and will be the least profitable. While they are good for the long term as they can help get volume up which will eventually lower some costs, they are not going to help you now.
The key is to know which sales channels/products/services/markets are both the most profitable for you, and are the shortest sales cycles.
The shortest cycles are often not the strategic accounts that will get you where you want to be in five years, but if you don’t work them now you might not be here in five months!
Cash management is like every other aspect of your business, you need to have short-term, medium-term, and long-term strategies. When it comes to sales and revenues, be sure that you don’t focus too much on the long-term items at the expense of generating the cash you need right now, or in 3 months. Put your cash flow plan together this week – before it is too late to prevent your next sleepless night.