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Super Charge Your Cash Flow


By Bill Vergantino, President and CEO of ExpenseWatch

One of the biggest reasons companies underperform or fail altogether is a lack of visibility to their cash flow. Without this visibility, organizations may spend more than the business can handle during the year, may spend at the wrong time period of the year, or may under spend for fear of running out of cash. No leadership team wants to compromise the viability of a business by either running out of funds or failing to maximize opportunities by unnecessarily slowing growth for fear of running out of cash.

For these reasons, it is critical to track cash flow on a regular basis – annually, quarterly and monthly. How often and over what time period an updated cash flow forecast should be prepared will be driven by each organization’s risk/reward assessment of the effort to prepare relative to the value of knowing.

Simply put, cash flow is the movement of money into and out of a business for a given time period. Positive cash flow means you have more money coming in from sales or donations than what is going out to vendors and employees. Negative cash flow, or cash burn, means less money is coming in from sales or donations than what is going out to vendors and employees.

I’m going to assume you know what your cash balance is right now by looking at your current business bank account balances. That figure is only useful for that moment in time. All organizations have money coming in and going out on a regular basis. Understanding the timing of these flows, and having the ability to alter the flow of cash based upon changing circumstances, are critical for running your organization efficiently.

If you can answer these three key questions with a great deal of confidence, then you are managing your cash flow well. If you don’t know the answers, but are the only one that is responsible for spending in your organization, then you may still feel good about your cash situation. If, however, there are others that spend and approve spend on behalf of the organization, and you don’t know the answers to these questions, you could be on a path to potential disaster.

  • What is my budgeted spending for this year?
  • What spend is in the process of being approved right now?
  • What is my projected cash balance over the remainder of the year?

What is my budgeted spending for this year?
Simply put, organizations have no ability to manage their cash flow effectively if they have not taken the time to prepare a budget that represents anticipated collections and spend. At a minimum, organizations should prepare an annual budget, but breaking the budget down by quarter and month is strongly recommended.

A simple approach to preparing a budget is to start by looking at your cash flow actuals from the previous year – the money you collected and the money you spent. This will be your baseline for the coming year’s planning process.

Then build out what you think your sales/donations collections and spending will be for the upcoming twelve months. As you make your projections, start by reviewing the list of each source of cash inflow and the reason for each cash outflow, the products and services where money was spent. Assess each and determine if anything may be changing in a significant way. For example, if your lease is coming due, will you be able to negotiate a better rate for your next term; if you are moving, will your lease go up?

Consult with key departmental personnel responsible for driving sales or donations and those who are the source of spending to get their input on what they anticipate inflows or outflows will be relative to the prior year’s actuals. Will sales or spending be the same, more or less?

Consider other variables. What changes may occur this coming year that are different from last year and could have an effect in altering cash flow either positively or negatively. For example, will you be hiring or reducing workforce. Consider how other strategic changes, such as new product/service launches, partnerships or pricing changes, may affect future sales or spending.

As you build out your cash flow projections, your tolerance for risk should drive how conservative your budget needs to be. If you have limited room for error, plan for spending the most you think is possible and combine that with the least possible sales/donation collections scenario possible, while maintaining a list of either upside sales/donation opportunities and/or spend avoidance possibilities.

Once budgets have been set, each department leader should be given the final budget for their area. Any unanticipated need for spending should be communicated to financial or C-Level executives for approval before it can occur.

What Spend is in Process of being approved or occurring right now?
It is great to know my cash balance now, but what spend is about to occur? Once the budget is set, which constitutes the plan, the key will be to maintain visibility and control of both a pipeline of actual spending that has occurred and spending that is in some stage of request/approval. If it doesn’t get approved and documented it shouldn’t be spent.

Separately, a pipeline for sales/donation opportunities must also be maintained in order to see actual sales/donations that have closed and pending ones in order to project cash collections reconciled against your inflow budget.

Most organizations are proactive in maintaining a view into cash inflows (sales pipeline), but most do not have any parallel view into the spending pipeline. As a result, they lack an ability to enforce spend policy, accurately forecast spending, and they lose the ability to inject themselves in order to stop or delay spending in process if situations dictate. Maintaining visibility to spend before it occurs and as it progresses through an approval process is almost impossible without an automated system.

What is my projected cash balance over the remainder of the year?
Financial or C-Level executives should meet with departmental leadership prior to each new quarter to evaluate where spending is relative to the plan. They should be equipped with what the cash balance is at the start of the new period, what the budgeted plan for spend is, and what spending against that budget has occurred already. The goal is to assess if there will be any deviation in planned spending, either up or down, so that an updated monthly/quarterly/yearly spending forecast can be maintained. A budget once approved, is set and it doesn’t change, but a forecast on spending relative to that budget, needs to be maintained and will inevitably vary against budget – if by nothing else than the timing of inflows/outflows.

A similar meeting should also be held with the leadership responsible for driving sales, donations and collections prior to each month or quarter to assess if the organization is tracking to the cash inflow plan or if circumstances have changed to enable the organization to forecast better or worse than planned inflows. Knowing this is critical to determine if more spending can be funded by over performance on the sales side, or whether spending less than what was even budgeted is required because of underperformance on sales. A final scenario is one where the inflows anticipated are consistent with the budget, but the timing of the collections expected may have simply moved to a different month, which means that anticipated spend timing may need to be altered.

Tips for Effective Cash Flow Management
In the event that multiple employees are responsible for driving sales or donations, most organizations use a customer relationship management system to help maintain the sales pipeline and visibility into future inflows by stage or progression. Similarly, in the event that multiple employees are able to spend or approve spending for an organization, an automated spend management software system should be considered to achieve that same visibility into the spend pipeline.

An automated spend management system offers companies automated policy enforcement, approval workflows, and real-time insights into spending from a variety of perspectives, while giving management the ability to minimize or stop spending before it can cause cash flow issues.

A spend management software system with approval workflow can equip approvers with valuable information to influence their approval decisions, such as whether a request is in policy, or if it is over or under budget for the spend category or for the department.

In addition, a spend management system can trigger additional approvals to occur if a request exceeds budgets and before a purchase order is generated.

Effectively managing your cash flow and keeping tabs on cash projections ensures that you can make more intelligence decisions about your business today and in the future. When you have your projections in place, take a look at the resulting cash balances. Is everything in line with your expectations, based upon what you know about your business?

An automated spend management system will make this process go much more quickly by putting historical spend data at your fingertips and enabling you to see spending in the pipeline that is waiting to be approved or paid.

Effective cash flow management also means you are doing everything to get money into your hands as quickly as possible and dispersing money strategically to take advantage of early payment discounts or pushing payments as far as you can without hurting the business. Here are just few ideas to help you manage the process:

Have a tight accounts receivable process and stick to it. Start byinvoicing when you ship your product or perform your service, not days/weeks later. Be sure to include when your invoice payment is due and any penalty for late payment.

Stay on top of your receivables and when they are due. Send an email the first day a payment is late, or call. Offer conservative early payment discounts, and charge a late fee for customers who pay late. Charge back customers who take a discount after the discount period. Don’t send new merchandise until payments are received for previous goods shipped.

Check the financial health of customers before you offer credit. Get business references and call them.

When you pay bills, don’t pay until you have to unless there is a discount for doing so. Also, if you use credit cards for travel, lodging, meals and small expenses, you can get as much as a 45-day period from the date of purchase before payment is due.

Finally, take the time to secure a line of credit long before you think you might have a short-term cash flow issue. It never hurts to have that safety net.

(Posted 5-21-15)

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