Data is considered the new oil, the more and more the business become large and complex then management by data becomes the most crucial
- After the event has happened what was our performance, we call them lag indicators
- Before the event has happened, this helps us pro-actively make changes for us to get the outcomes we desire we call them lead indicatorsFor example if we look at the profit and loss account only at the end or the year.. it’s a lag indicator but if we keep looking at the performance month on month it becomes a lead indicator which helps us know identify any changes to be done..
The quick and easy way for business to proactively manage is to review their cash flow statements frequently at least once a month
- By doing a projected cashflow analysis you would be able to
- Not miss any payments and eliminate the risk of downgrade of your credit worthiness (when you do a projected cash flow)
- It will help you ease the stress as you will know beforehand if you will have a gap in cash flows and have a mitigation plan for the same by arranging funding before hand etc and avoid last minute surprise
- You will get and understanding of your breakeven point i.e. the min amount of cash that has to be generated month on month will help control the business better
2. Cash flow statement will help you ?identify places the money is getting blocked like
- Long credit period we have given to our customers : ?You could look at putting a credit policy for each customer based on past payment record, if customers having a bad record not allowing further credit until old outstanding is resolved. ?
- Money in inventory or stock that is not moving or slow moving: You ?have a strategy of only holding stock of high moving goods. For the goods of slow moving have a policy for advance payment so you do
- Loan given to employees : at times there would be drawls from the business for personal use by directors /partners and also employees availing loans .. if this is not properly planned could lead to cash crush for normal business activity
- Excess capacity or investment in capital asses : For large investment if we have funded from short term investment we will soon face a cash crush .. also if we have invested in too much of excess capacity that will result in less return on capital..
3. There could be many places the money is getting leaked /wasted if you observe any of the below you could have specific projects identified and worked upon to resolve these issues
- Wastage in production
- Idle man hours
- Underutilisation of resources (example high bank balance in current account)
- High interest rate loans
- Theft/fraud
- Redundant processes
Just by review of the cash flow statements you will get a clear idea on areas that need to be focused upon and addressed, the more and more areas are identified and improved the more in control of the business you will be