We have all heard of the expression ‘cash is king’ but so few companies actually manage cash effectively or even take cash flow seriously. The number one reason for any company or organization going bankrupt is lack of cash. Why it is that so little emphasis is placed on managing cash flow? In defence of accountants, most will tell executives that a positive cash position is essential in the organisation’s ability to survive, sadly however, this valuable advice is all too often ignored. Is this advice ignored deliberately or out of ignorance? Is it ignored because the executives involved do not fully understand what elements of the organization effect cash flow? In our experience the advice is rarely ignored deliberately, but is definitely a combination of ignorance, lack of daily cash projections and a lack of understanding of the processes that affect cash flow. The million dollar question then is what exactly is the problem?
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Introduction We have all heard of the expression ‘cash is king’ but so few companies actually manage cash effectively or even
take cash flow seriously. The number one reason for any company or organization going bankrupt is lack of cash.
Why it is that so little emphasis is placed on managing cash flow? In defence of accountants, most will tell
executives that a positive cash position is essential in the organisation’s ability to survive, sadly however, this
valuable advice is all too often ignored.
Is this advice ignored deliberately or out of ignorance? Is it ignored because the executives involved do not fully
understand what elements of the organization effect cash flow?
In our experience the advice is rarely ignored deliberately, but is definitely a combination of ignorance, lack of daily
cash projections and a lack of understanding of the processes that affect cash flow. The million dollar question then
is what exactly is the problem?
The problem is very simply two fold:
A lack of the social aspects of cash flow.
A lack of understanding the operating elements affecting cash flow.
Social Aspects of cash flow
Basically CASH FLOW is an A.R.T.
The 3 most crucial social ingredients to keep a positive and healthy cash flow while building the business and maintaining the business is:
A - Attitude R - Relationships T – Trust
Attitude
The individual handling of cash flow is a huge role in the company. Just like the anesthesiologist putting the person to sleep before and during surgery. Applying a positive, open and passionate attitude towards money and the overall power and circulation of money is the first essential key. Attitude will shift the "so called' cash flow position from stressful to manageable relationships.
Relationships
Relationships are the heart of the business - without relationships there is no business and there is no money. Running a small company or a big organization one must learn and build strong, lasting and honorable relationships with bankers, customers, vendors, etc. You must go the extra mile and follow up on these relationships and keep them alive; an example; ask the vendor or customer about some of their personal things like when did you move to..........where did you go to school.........do you like to travel?
Slowly you make them important and interested, try not to be interesting but interested. Find out in genuine fashion their birthday, their favorite hobby, etc. Call them and wish them a happy birthday and the relationship will flow and grow with time.
Trust
We are living through challenging times and technology is very advanced and yet a promise must be honored, a hand shake needs to be considered as a commitment and must be honored. Therefore when we respect these areas and are trusted we have CREDIBILITY AND CREDIT.
The Weberburdette Cash Wheel
The Weberburdette Cash Wheel uniquely combines the social as well as the operational elements of cash flow. The ART symbolizes the social aspects of cash flow and the others symbolize the operational aspects. We have looked into the social aspects of cash flow so now we will look into the operating elements affecting cash flow in detail.
Operating elements affecting cash flow Before we start anything, the big question is;
Do you have daily cash projections?
If the answer is no, then get this started before you do anything else. Nothing is more important, I mean nothing!
We have very simple templates available, just contact our office or visit our website at www.weberburdette.com
SCENARIO 3 – HIGH PROFIT AND GOOD DEBTOR MANAGEMENT
Doesn’t this present a good picture? In this scenario, the company has plenty of cash, has huge potential for
acquisitions, and captures more market share. Debtor days in this scenario have been reduced to 35 days instead of
70 days. The profit has been kept the same as for scenario 2.
It is important to note that in order to keep the examples simple we have not included stock in these three tables.
Stock turns, however, would have an impact on growth potential too. The higher the stock turns the better it will
reflect on your cash flow.
WHAT FACTORS INFLUENCE CASH FLOW?
Profit before Tax
Profit is critical to healthy cash flow. Anything less than 10% profit (before tax) as a percentage of sales is the first
sign cash is under pressure. In fact a PBT (profit before tax) of 15% or higher is desirable. If your profit is below 10%
then FIRST get your company in order before doing anything else. So effectively, introduce a ‘profit growth
program’ before a sales growth program.
Some typical areas to investigate how to improve profit are;
Wages and Salaries (Gross) Should be 32% of Sales or less Cost of Sales Must be 70% of sales or lower Operating Expenses Must be 15% of sales or lower Product and Customer Mix Very often profit can be increased without increasing sales
Debtors
Bad debtor management is the most common area of mismanagement. Debtor days should be between 30 to 45
days. In some industries (such as Automotive, Publishing and supplying to Government departments), this is
difficult to achieve, however, look for alternatives solutions. If you are in an industry, where it is difficult to get
debtor days to between 30 to 45 days, then the only way to compensate for this is with increased profit. In
addition, you need to manage your costs, marketing and fixed costs accordingly. What debtor days of say 70 means
is that you are financing your clients for 70 days, whilst you still have to pay wages, creditors, taxes and utilities,
This Quadrant, whilst indicates some serious issues regarding profit and/or cash it does show that debtors and/or
stock turns are managed well.
Recommendation – Get your profit and cash sorted out, this will take time. Don’t favour business growth yet!
Problem Quadrant
This quadrant is the very worst position you could be in. Everything is a mess.
Recommendation – GET HELP FAST and possibly new MANAGEMENT!
Back to the social aspects With customers you basically build a reliability framework - with attitude, relationships and trust you will get paid within the expected terms give or take an additional two weeks of when you projected payment. When you project in this fashion you eventually have a constant stream of cash flow coming in on certain days, as indicated on your daily cash projections. With vendors you need to understand their business and build the terms of payment accordingly. It is no good insisting on 14 days or 30 days if you know that is not going to happen. Build in terms with them and pricing according to the terms they can meet. Always offer the base price in the way of an early payment discount. The terms you agree to must be built into your cash forecasting. Remember cash flow is dependant on profit and debtor days in these cases, so as debtor days goes up, so must the profit. We have heard all the cries about the customer demands the terms! That is rubbish, because if your customer drives how you manage the business then the business is in trouble. Building relationships with vendors and customers is essential, together with a compelling unique selling proposition. Practicing this program for a combined 60 years we are able to build companies from ground up, maintain a good internal cash flow without the need of outside investors or bank loans.
Company A.R.T. (attitude relationships trust)
These areas must be applied towards the entire staff When you create and maintain a good attitude at work employees will go the extra mile for you and deliver much higher productivity. Give out monthly bonuses and motivational tools, based on efficiency, giving to others in terms of learning and helping, and positive attitudes. Give them a paid day off on their birthday or important wedding anniversaries. Keep the moral high, uplifted and contented - happy people create success.
Relationships
Build strong and amicable relationships with the entire staff Cross train Managers need to be hands on and teach and help and be open to questions Conduct weekly short meeting for trouble shooting areas and listen to solutions and ideas inspired by employees TRUST YOUR SERVICES AND PRODUCTS Believe in what you have if not why should anyone else Trust that you will succeed by following these steps and trust the purpose and the cause for the business.
CONCLUSION Business and therefore cash flow are not just a numbers game or a game where one irresponsibly mismanages organizations based on numbers alone. As managers, executives, business owners and shareholders, we have a responsibility to perform our business well but we also have a social responsibility to employ people, which help communities to sustain a decent way of life, delivering opportunities for shelter, food, confidence, education and most of all to express their opinions freely. We also have a responsibility to educate, teach, and mentor our staff, customers and suppliers to create trusting relationships that will continue sustainably into the future. For your strategies to become more enriched, you need everyone in the organisation, suppliers and clients to contribute to its evolution. This recipe is what strong nations are built on.