“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” Warren Buffet
Mismanagement of cash flows is a leading cause of failure among businesses. Business owners do not realize how critical it is to budget and plan cash flows from the beginning of the venture and most times a liquidity crisis catches them completely off guard. This often leads to irrational last minute maneuvering which amplifies the problems at hand. To ensure smooth cash flow cycles we have to ensure that we are extremely vigilant of the financial health of our business from the onset. This may appear to be over simplistic advice, however the truth of the matter is, not enough emphasis is given to this function. The excitement lies in closing those million dollar deals and creating fancy marketing campaigns. Reality of the matter is that if we do not have the financial structure in place to support these deals and campaigns we will soon find ourselves in a lot of trouble. Listed below are a couple of tips which have helped me manage cash flows better.
1. Inflows & Outflows: From the onset identify your inflows and outflows. If you have adequate historic data, map out how long on average it takes to receive cash after providing your product/service. Next carefully map out all your expenses, and dates when they need to be paid. Next we have to minimize the time between the two flows. Usually inflows are much slower than expected and this needs to be compensated by negotiating favorable agreements with suppliers, stocking less and invoicing your customers at regular intervals. To learn more about the importance of mapping out inflows and outflows please click here.
2. Cost Management: Cost cuts do not necessarily require a business to layoff staff or drastically cut marketing expenditure. I take the approach of measuring cost effectiveness in terms of every product or service that the business is providing. The goal must be to provide the product or service at a lower cost than the competition. Identify all direct costs, incremental costs of increasing volume, fixed costs and overall cost structures in comparision to the competition. This does not necessarily have to be reflected in lower price points. As we widen the cost comparison between competitors, we are able to hold a much stronger position in the overall industry. To learn about each cost in greater detail please click here.
3. Marketing: Cutting marketing expenses to conserve cash is often not the most optimal solution for solving one’s cash flow problems. Assessing marketing strategies and tactics needs to be practiced on a regular basis. It is not wise to make marketing expenses cyclical with business cycles. With optimized marketing campaigns and strategies in place, a business has greater chances of avoiding these cash gluts as business is constantly being generated at a healthy level. To learn more about marketing strategies during a liquidity crunch please click here.
4. Technology: Gone are the days of keeping track of your business expenses on excel sheets. As a business owner today we should use one of the many accounting packages available to make sure we always have a financial snapshot of the health of our business. This will provide us with the ability to quickly identify trends and potential liquidity crunches before they take place. Please click here to read five questions you need to answer before selecting which accounting package is right for you.
5. Last Resort Measures: There will be times however when a liquidity crisis will hit . It is important that when it does we remain calm and evaluate the options we have instead of making rash decisions. The options I have used during these period of times are, discounting, credit cards, loans from friends and family, invoice factoring and secured credit lines. All of these options need to be used when all other alternatives have been exhausted. Attention needs to given to ensure that all documentation has been read carefully and that one is fully aware of the pro’s and con’s of each measure. To learn more about each measure please click here.
Those who have experienced liquidity crunches realize how stressful and frustrating these cycles are. They can result in partners leaving the business, unpleasantness at the office and even eventual closure of the business. Using some of the tips provided above we can avert a number of these situations. It comes down to better financial planning and catering for unforseen events. We have to be prepared when such situations arise and must deal with them face on. There is no need to dig ourselves deeper into a hole by using temporary fixes. If the business that you are running is repeatedly running into cash flow problems, do your best to re-engineer it from the ground up, or have the discipline to change boats.