Phillip Campbell, CPA, CFO, and author of Never Run Out of Cash, says, “Despite the fact that cash is the lifeblood of a business – the fuel that keeps the engine running – most business owners [and CEOs] don’t truly have a handle on their cash flow. Poor cash-flow management is causing more business failures today than ever before.” To help CEOs manage cash more effectively, there are two areas on which they need to concentrate: revenue and spending. What’s coming in, and what’s going out. Let’s take look:
- Profitability vs. cash. When managing cash flow, it’s important to realize that profit is not the same thing as cash. There’s an old expression: land rich and cash poor, which refers to ranchers who have property but no cash flow. It’s the same in business: they may be “profit rich” but cash poor. Profitable companies can become insolvent because they didn’t have the working cash to fund daily operations. You want to keep a close eye on your cash.
- Billing. How do you manage this process? If you are billing clients, the key is ensuring invoices are sent as soon as possible. This might mean emailing more bills, which can be quicker. The sooner invoices are sent out, the sooner – in theory! – you can receive payment.
- Collections and terms. How long should you give customers/clients to pay their bills? Should you collect a deposit for work to be done? If not, how do you go through the credit process? How do you determine who is credit-worthy and who is not?
- Payroll. Employees: you can’t live without them – and you certainly can’t live without paying them! Payroll is typically one of the biggest expenses a company has to cover. The question is how do you manage your payments? How do you put payroll first and ensure your people are paid on time?
- Payments. Then comes all the other payments! Vendors, suppliers, rent, insurance, leases… How do you manage those expenses? BottomLine Growth helps CEOs set up cash flow models so they can estimate the money coming in, and see exactly how it’s going out. This also allows you to see where there are shortfalls and excesses so you can make solid, strategic decisions to manage cash effectively.
Keeping on top of cash flow helps CEOs ensure their companies have the working capital necessary to pay their people, pay their vendors, and, essentially, make it through the day/week/month! But strong oversight here also helps leaders develop a more accurate sense of how much cash they need to allow their businesses to overcome challenges, grow, and thrive in the longer-term.