Effective Management of Cash Flow

Effective Management of Cash Flow

Managing cash flow is every manager's challenge, every day, every year. Those managers who keep a close eye on their daily work and developing business trends might limit their company’s exposure to the chill of a cash shortage.

How can you prepare for, avert, or lessen the effects of a financial crisis?

First, keep an eye out for cash flow problems. When money is tight, it's important to stay alert and ready to take action. The following are some of the questions that need to be addressed:

What triggered the problem? Pre-payments to take advantage of exceptional reductions can decrease cash. Strikes in the transportation sector, for instance, might hold up shipments and, by extension, payments. As the business world (and the economy) slows down, many consumers may delay payments.

To what extent can you anticipate difficulties and how? Don't honor the large discounts if your cash flow is weak. It’s usually more cost-effective to pass on a discount than to borrow to overcome a deficiency. Learn to keep up with the latest headlines. If you hear about any threatened strikes and/or disruptions to your supply chain, make sure you have a backup plan. Even though it is initially more expensive, it can rescue your firm by showing your clients your reliability and versatility in hard times. Customers in sectors hit severely by the recession require continuous monitoring of credit rules and aggressive collections. Tighten credit terms with discretion if necessary. Keep your consumers around and increase your revenue by being firm while still being kind. Defer purchases and/or arrange prolonged payments if cash is short.

It is crucial to keep track of both problem indicators and your responses. In this manner, if the signals reappear, you'll have a starting point in the form of your previous successful response.

Consider the possibility of irregularities in your cash flow, which are always present but rarely predictable. The "what if" method is useful for solving situations that can't be predicted. No need to go into detail, but it's reasonable to wonder what might take place in the event of a flood or, more recently, a terrible hurricane. The question then is, "What?" Product sabotage and other issues can only be addressed when they arise. Scenario planning is a useful management tool for lowering the probability of "unpredictable" outcomes. If you don't learn and remember the lessons from your past mistakes, you might have to keep making them.

Second, watch sales A prolonged (how long "prolonged" is depends on the company and industry) decline in sales without a corresponding and emerging reduction in expenses is a recipe for disaster. It's true that there's typically a lag time between a bump in sales and a corresponding drop in expenses, but catching the problem early on can help mitigate its harmful effects. If you notice a shift in the market, you need to react quickly, or the consequences will be far more severe.

Finally, check the finances. If short-term borrowing is routinely required to pay regular operational costs, then an unexpected increase or decrease in those costs could have a catastrophic impact on the business.

Either additional sales need to be made or expenses need to be reduced, or both, if ongoing operations can't be supported by sales. While this sounds extremely straightforward, all too many companies hesitate "in optimistic anticipation." A significant cash shortage may ensue if solutions are not implemented in a timely manner.

Fourth, keep a careful eye on new product development. The research and development (R&D) budget for new goods at many companies has a lot more wiggle room than the regular budget. After all, it is extremely difficult to foresee initial costsseor turnaround timeenwhen developing anything brand new.

Failure to keep these costs and time commitments within bounds or monitor their continuing impact and cost/benefit can lead to continued funding of projects well beyond when they should be cut off. Overall cash flow can be easily drained into a seemingly bottomless pit, and often an entire company is jeopardized by one errant project.

Fifthly, be wary of side endeavors. A pet project is any organizational activity undertaken for ego value rather than consistency with the organization's mission and profit targets. Whether they are brand new businesses or ongoing cost and profit centers, personal pursuits have a nasty habit of draining the bank account. Every company occasionally focuses on something special. Many businesses have met their demise due to their owners' inability to recognize and deal with a pet project as a cash crunch approaches.

Such elementary causes underlie a lot of cash flow problems. Most of the time, all it takes is a few days or weeks for them to sneak up on you. The routine of life might make it difficult to see clearly, give false hope, or keep you distracted long enough for issues to take root. The lessons can be applied to both current and future cash shortages. Keep an eye on things like revenue, expenses, and research and development expenditures to ensure they are all in check. Your personal endeavors can remain under wraps. You need to be on the ball in today's fiercely competitive global economy.