For a Business – Cash Flow is King

Cash Flow can be considered a barometer of the financial health of any business.  An effective cash flow policy includes planning and management.  In a perfect world, your monthly revenues cover your monthly expenses and leave a surplus, i.e. a profit that increases cash reserves.  But the perfect world is a theoretical place.

In reality, businesses have cycles.  Retailers that survive lean months are able to benefit from the peak shopping season that occurs from the end of November through the early part of January.  Drug companies invest large sums of money today in research and development, to offer a medicine in the future for a finite time period, prior to patent expiration.  These are examples of industries that excel at the planning and management of cash flow.

But the benefits of proper cash flow management or the penalties of poor planning can affect companies of all sizes.  Drains on a company’s cash flow fall into two categories –

  • Controllable – expenses where management has a potential impact, which include – salaries, rent, advertising and marketing, travel & entertainment expenses.  This impact can be defined as controlling the amount of the expense or the timing of the expense.
  • Uncontrollable – expenses where management has little or no ability to impact, which include delayed payments from individuals or companies where you extended credit i.e. customers 60, 90, 120 days past due.

Poor cash flow management will impact a business by constraining its ability to fill orders timely if inputs and/or inventory purchases are delayed; replacing outdated equipment; and, implementing process improvement which historically has upfront costs, prior to the savings.  As a result of these issues, a business may be forced to seek financing from a lender; and/or, seek outside investors.   If unsuccessful at these activities, the business may need to close its doors or sell to a competitor.

In my experience, the best way to avoid these business constraining impacts is to ensure an annual budget is established.  Subsequently, monitor actual results to understand if these results are in line with your expectations.  Monitoring should occur monthly with the results reviewed with senior management.   If needed, expectations should be adjusted to account for any unanticipated business change.

Even after all the planning, it is prudent to maintain a cash reserve cushion.  The proper size of this cushion is dependent on the business.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.
© Copyright 2012 Regis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!

Regis Quirin

Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

36 thoughts on “For a Business – Cash Flow is King

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  15. Cash Flow is King, Agreed fully. I would like to add here that in today’s competitive business environment it is recommended to review the cash flow pattern on a going concern basis. Considering the retail segment, the choices and buying pattern of consumer is changing. The cash flow pattern of FMCG is not exactly the same as it used to be 20 years before. Therefore, it is prudent on the part of CFO that he predicts the future trend of cash flow and accordingly put recommendation in front of management or investor.

  16. I agree that cash flow is a company’s life blood. I also agree that an annual budget should be established and closely monitored. Where I disagree is in the author’s observations on “Uncontrollable” cash flow drains. First, poor cash flow can be much more effectively managed and subsequently improved by establishing policies to control extended credit. CFO’s should consider tighter credit standards in times of poor economic conditions. What good is accomplished by selling to a customer who will not pay within terms, or not pay at all? Second, CFO’s should take a closer look at how debt is managed. Is staffing adequate in the credit department? When in-house efforts to resolve debt issues fail, are procedures in place to refer 60 or 90 + accounts to a competent 3rd party collection firm? By setting up these relatively simple safeguards, “Uncontrollable” cash flow drains become considerably more controllable and cash flow improves dramatically.

  17. Cash flow is actually the life blood of any company. I fully agree with your observations. If it comes to Small Business companies, the cash flow is a deadly trap. In particular in Hotels, Restaurants, Car Repair companies, just to mention a few. The owner do not understand, or do not have the necessary discipline to plan ahead. All they see is positive cash flow until the moment comes when they have to invest in a new truck, new Kitchen equipment, and other one time exceptional cash outflows

    1. I agree cash flow is the life blood of any kind of companies, especially for companies who are growing up. The planification of the extra cost and how to afford it has to be clearly identified on the cash flow.

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