Cash flow, simply put, is maximizing the cash in
and minimizing the cash out.
Cash In
Cash in starts with the identification or creation of a demand and the ability to satisfy it; Sales. While Sales are the first step in Cash In, it is a topic itself. For this discussion, we will assume that Sales are maximized.
Sales do very little good if you don’t get the money. Consideration must be given to the proper terms of payment. The purpose of terms is to enable sales; at a cost. They are a function of the Business Plan.
After these decisions have been made, the remaining issues of Cash In are more mechanical. Accounts Receivable should be more than just a list of who owes you. Properly worked, it becomes a predictable indicator of cash in. In addition to that, it can be used to evaluate the quality of customers and the cost of doing business with them.
Cash Out
Cash Out begins with the cost of inventory. Consider the purchase, transportation, and carrying cost. The easiest money saved is the money not spent. Constant attention should be given to maintaining advantageous purchasing, proper inventory levels, and order quantities.
The next source of Cash Out is the cost of taking the purchased inventory from the form in which it is purchased to a saleable form. This could be as simple as moving an item to the shipping dock, to a complex manufacturing process that requires series of time-in-motion, work flow, and other studies to determine the actual cost.
Just as most Cash In events find their way to Accounts Receivable for administration, so do most Cash Out events find their way to Accounts Payable. Such factors as the time cost of money, discounts, weighted evaluation of vendors, determine the timing of payments. These decisions are made at the management level. The Accounts Payable group can make a big difference in the Cash Out by strictly adhering to a receiving and invoice verification policy that will catch shortages, substandard materials and returns them for proper credit.
Summary
In the normal course of business, there is only one thing that can force the closing of a business and that is insufficient cash. Of course, there are many causes of insufficient cash, each of which is a topic of its own, but it is the cash alone that is the actual “cause of death”.
Cash flow is like the Circulatory system in the human body. It makes no difference why the heart stops, if it stops, the body dies. Keeping a healthy heart requires day to day vigilance and making the right decisions so your heart can be ready for any trauma or exercise. Keep your cash flow cholesterol low and don’t let plaque critically restrict your “life’s blood”. |
