The Problem With Your Cash Flow Isn’t What You Think It Is
On occasion I’ll run across an article I think is worth reading but realize you might not have time to read the entire work. In that case I’ll offer a digested version with a link to the original article. That’s my “value add” (smile).
In this case the author, David Safeer, describes the underlying problems with cash flow and how to address them. But if you take him to heart, you’ll realize that David is actually making a much bigger point about mistaking symptoms of a problem with the problem itself. Happens all the time. People are working harder than ever and fast answers to thorny problems can be downright seductive.
David artfully uses his own experience as a homeowner with a leaking pipe to illustrate his point. His wife noticed water in the basement and after some investigation David discovered that running the Dishwasher was producing the leak.
David, realizing he was out of his depth, called in a plumber, who was able to isolate the underlying problem. Turned out there was a crack in the pipe that ran from the dishwasher to the basement. The plumber removed that part of the drywall, replaced a portion of the pipe, and solved the core problem.
That’s the difference between treating a symptom and solving the problem.
If David had treated the Dishwasher as the problem, rather than a symptom, the “solution” would have been to stop using the Dishwasher (or replace it, only then to discover after the fact that the leak in the basement remained).
In my own line of work I often hear “Our corporate planning & budgeting process takes too long and delivers too little value.”
One common symptom (of many) is budget holders make changes and Finance is left in the dark – discovering only by chance – and often at the worst possible moment -- that the numbers have changed underneath them.
“I want a system that tells me every change that anybody makes at any time, and I want it time stamped, so I don’t get surprised.”
Most systems can deliver that, it’s not even hard to do. But it’s treating the symptom rather than the underlying problem.
The bigger issue is the process isn’t controlled. So the better answer is to implement a system that will help manage the process through a combination of intelligent workflow, combined with effective use of versions and locking mechanisms. There’s more to it than that, but the point is there’s a much more effective answer than simply producing an audit trail.
Okay, getting back to Cash Flow, here is a summary of David’s suggestions (you can read the detailed set of recommendations here).
1.?Look for the causes of the problem, not just the symptoms
2.?Remember that Assets?are not?Profits
Remember: The cash you have in inventory, and other assets that have a higher value?if?you sell them, are not worth that much until they are actually sold!
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3.?Turnover
Turnover relates to the concept of selling your inventory and reinvesting quickly.
The concept of velocity is captured in the?Cash Velocity Calculator, a tool to help you understand and better manage the cash invested in your working capital; accounts receivable, inventory and accounts payable.
4.?Impact on the business
Try to identify the big impact items. Big impact items include: Past due receivables, excess capacity and inventory, high customer acquisition cost, and a long time from sale-to-cash or cash-out to cash-in.
5.?Relationship driven transactions
Many of your cash management problems will be fixed at least in part based on the relationships that you have.
Customers may need to pay faster, put down a deposit, work with you to simplify their ordering or shipping process, etc.
Vendors will be happy to work with you. Your current ones should be happy to help you fix your challenges.
6.?Systems
Cash management is an everyday exercise, so put systems into place that make sure cash management is happening. The best systems are automatic with no time or effort in maintaining them once they’ve been implemented. An example is automatic bill pay, or even better, clients automatically paying you each month.
7.?Tools
A dedicated cash management tool will have the biggest impact on your ability to understand when you are getting paid and deciding when to pay your bills.
The key is deciding the right tool for the right job, so figure out what your challenges are first, and then go find the right tool to fix your problem. A good place to start is developing a cash forecasting model.?
8.?Continuous improvement
Don’t try to do everything at once. Instead decide on a limited number of things to work on. Finish one and add a new one to the list. You can work on one big issue while completing multiple issues.