Let’s go through the preliminary process to analyze your company’s cash position, its trend in cash flows, and alert you to how certain strategic decisions may impact that cash flow.
First, look at your company’s current cash position. To do this, use what Meridian has coined as “True Cash Position” which equals your cash balance on any given day minus your revolving line of credit balance.
Whether you use True Cash Position or Net Cash After Operations as a basis, your next challenge is to identify your company’s cash flow trends. If you take just a few minutes to enter these numbers (over a two to three year time frame) into a simple spreadsheet, and then produce a graph, you will easily detect trends. There is also software that can be used with your accounting software to provide the trends for you.
The best case you can hope for is an upward trend which indicates improving cash flow. Pat yourself on the back and keep doing what you’re doing. Your cash will continue to improve without any new strategies.
The worst case is a graph that shows a steadily declining cash flow. You absolutely must make a strategic change. Cash flow will continue to decline unless you make a strategic shift. In other words, if you keep doing what you’re doing, you’ll keep getting what you’re getting — draining all your cash.
For many companies who are seasonal or cyclical, the graph may show mixed results. Your best bet is to graph the monthly cash flows over a three-year period. This should allow you to pinpoint the cash flow peaks and valleys within any year. Your challenge is to develop a strategy that will smooth out the dips and keep cash flowing during your normally poor cash periods.
Remember during your analysis that cash flow is different from profit. Your company may be profitable, but lacking cash flow. This is just as severe a problem as a company that is having losses because eventually you will run out of cash entirely!
For a company that is profitable and shows downtrending cash flow and therefore loss of actual cash, your strategic plan must contain actions to produce cash flow in your existing business or through development of cash-flowing new opportunities.
As you look at the range of strategic opportunities, you must consider the cash flow impact of each strategy as well as the profitability and return on investment. To do this, first consider any cash outlays the action may require at the onset. Next, consider the ongoing cash inflow or outflow each action will produce over time.
Before we tackle new projects, let’s first identify strategic decisions that will produce cash internally. Some effective strategies include:
- Switching customers to EFT collection terms.
- Reducing inventory levels.
- Consolidating and refinancing loans.
- Instituting a purchase order system.
- Financing new asset purchases.
- Reducing employee turnover through hiring and retention programs.
- Reducing expenses.
- Implementing sales and marketing plans that maximize gross profit.
If you could master just the above eight items, you’d likely have a considerable impact on your existing operations cash flow. But if you are like most family business owners, you have grand growth plans. Let’s take a look at the cash flow impact of some typical growth strategies:
Acquire another business – First, you have the cash impact from the actual purchase. The acquisition normally includes an up-front cash expenditure. Next, will you be selling off any of the existing assets. If so, these sales should theoretically replenish your cash.
Next, you need to determine the ongoing cash impact of your acquisition. Your acquisition is either producing cash flow or experiencing a cash flow drain. More often than not, companies for sale are having cash flow problems, so don’t get your hopes up too high! If the cash flow is poor, you will have to make strategic changes to the acquisition’s operations to turn it around.
If your acquisition involves a company with receivables, remember that you will need additional cash to finance the extra receivables as well as regular operations.
Build a new store – Typically, if you can get the site financed and do a fabulous job with merchandising, a well-located store will be a cash flow producer within a few months of opening.
Sell off a marginal division – This is an excellent cash flow producer. Often we have sectors of our business that are just sucking cash from the bottom-line. You may find a vast cash flow improvement by getting rid of just the one bleeder in your otherwise generally good operations.
So, as you finalize your strategic plan, remember it takes more than profit to prosper, it takes cash.
