Managing The Cash In Your Small Business
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Managing The Cash In Your Small Business
The recession seems to be nearing it's end and good times are on the way. Sales will begin to grow and we will be busy again. End of problem? Not really - beware of the cash crunch.
By: Michael Davel Anderson
The recession seems to be nearing it's end and good times are on the way. Sales will begin to grow and we will be busy again. End of problem? Not really - beware of the cash crunch.
By: Michael Davel Anderson
Yep, as sales grow, cash decreases. How can that be? Read on.
In the article "What does the CEO of a small business need to Know" I referred to the importance of Cash Planning. In that same article I noted that cash flow was more likely to cause your business to falter than any other reason. How can I say this? Simple. Experience tells me that most small business owners, CEO's, Presidents, or owners don't give this important area the attention it deserves.
"If the business is making money, there will be enough cash!" I have heard this so many times but it is so wrong. Why? Firstly, because all profit is not cash. Most often the the "profit" is consumed by increases in receivables and inventory and cash actually goes down. Yes I know you need inventory, and receivables are a part of business but the point is if you prepare for them. they are manageable.
So what do we have to do. The simple answer is to project where we are going to be in a week, four weeks, or more, up to twelve weeks if you can. After that, update your projection each week. "That's fine," you say, "But who's got the time?" A good question, but the answer is just as good, "Learn to do it properly, and you and your accounts person will not only have the time, but you will find that the time you have saved on dealing with crises gives you more time for other things. Now this is not a platitude, it's a promise.
We will talk about this a lot more, but just to whet your appetite, the equation for cash flow is given by (simplified to eliminate financing effects):
Cash Flow = Sales - Cost of Sales - Overhead + Decrease in Net Current Assets - Net Increase in Other Assets.
I emphasized the "decrease" in current assets because this is where the "management" of cash flow comes in. This seems more complicated than it is, and I recommend a little spreadsheet that does all the hard work, and most of the data will come directly from your accounting system untouched by human hands.
In the article "What does the CEO of a small business need to Know" I referred to the importance of Cash Planning. In that same article I noted that cash flow was more likely to cause your business to falter than any other reason. How can I say this? Simple. Experience tells me that most small business owners, CEO's, Presidents, or owners don't give this important area the attention it deserves.
"If the business is making money, there will be enough cash!" I have heard this so many times but it is so wrong. Why? Firstly, because all profit is not cash. Most often the the "profit" is consumed by increases in receivables and inventory and cash actually goes down. Yes I know you need inventory, and receivables are a part of business but the point is if you prepare for them. they are manageable.
So what do we have to do. The simple answer is to project where we are going to be in a week, four weeks, or more, up to twelve weeks if you can. After that, update your projection each week. "That's fine," you say, "But who's got the time?" A good question, but the answer is just as good, "Learn to do it properly, and you and your accounts person will not only have the time, but you will find that the time you have saved on dealing with crises gives you more time for other things. Now this is not a platitude, it's a promise.
We will talk about this a lot more, but just to whet your appetite, the equation for cash flow is given by (simplified to eliminate financing effects):
Cash Flow = Sales - Cost of Sales - Overhead + Decrease in Net Current Assets - Net Increase in Other Assets.
I emphasized the "decrease" in current assets because this is where the "management" of cash flow comes in. This seems more complicated than it is, and I recommend a little spreadsheet that does all the hard work, and most of the data will come directly from your accounting system untouched by human hands.
With 45 years of experience in leading positions in business across North America and internationally, Mike Anderson knows the business of business. More important, he has learned how to teach it. He is now consulting to small and medium sized companies, specializing in CEO and senior management training. Please Visit www.trainmetobeaceo.blogspot.com
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