Got Cash Flow? (Part 2 of 2)
July 20, 2009, 6:54 pm
Copyright © 2009 Integrated Profitability TM
In the article before our regular blogging got interrupted with “Breaking News” (“Got Cash Flow? (Part 1 of 2)”), revenue and expense information was gathered in order to figure your company’s cash flow. For revenues and expenses, the method of payment was highlighted because it provides insight into ways to improve cash flow. Here is what the table of information might look like:
|
Payment Method |
Revenue ($) |
Rev (%) |
Expense ($) |
Exp (%) |
| Cash | ||||
| Debit Card | ||||
| Pay Pal (or similar) | ||||
| Check | ||||
| Credit Card | ||||
| Government Programs | ||||
| Invoice | ||||
| I.O.U. / Promissory Note | ||||
| Other (describe) | ||||
| Other (describe) | ||||
|
Totals |
($) |
(%) |
($) |
(%) |
The order of the “payment method” is from immediate-cash to much-later-cash. For your business, fill the chart in, adding and taking away payment categories to fit the way your company operates. As you fill in the information, jot down estimates of how long each payment method takes to convert to cash. For revenues, that is how long you are financing (carrying) your customers. For expenses, that is how long your suppliers and creditors are financing you.
As you compile these numbers, do you notice any changes happening over time? Unfortunately, the time it takes revenue to convert to cash naturally increases, while the time it takes expenses to be paid in cash decreases. If both of these trends are happening in your business, your cash flow is getting doubly squeezed. If your cash flow is getting squeezed too hard, let’s talk.
In the meantime, here’s a generic approach to assessing the state of your company’s Cash Flow:
1. Review the trend in the financials (monthly data is best)
2. Identify issues
● For example, the further down the list your revenue streams are, the bigger the pressure on Cash Flow. The opposite is true for expenses.
● What are the trends in both? If the cash portion of revenue is increasing, and the cash portion of expense is decreasing, then your cash flow should be increasing (NB: assuming your pricing and profit dynamics are good).
● The following tables (using actuals for a few days or estimations for a month) will help with the timing of the all-important conversion to cash:
For Incoming Revenue
| Payment Method |
Revenue ($) |
Rev (%) |
Date of Sale |
Date Cash Recd |
| Cash | ||||
| Debit Card | ||||
| Pay Pal (or similar) | ||||
| Check | ||||
| Credit Card | ||||
| Government Programs | ||||
| Invoice | ||||
| I.O.U. / Promissory Note | ||||
| Other (describe) | ||||
| Other (describe) | ||||
|
Totals |
($) |
(%) |
($) |
($) |
For Outgoing Expense
| Payment Method |
Expense ($) |
Exp (%) |
Date of Purchase |
Date Cash Paid |
| Cash | ||||
| Debit Card | ||||
| Pay Pal (or similar) | ||||
| Check | ||||
| Credit Card | ||||
| Government Programs | ||||
| Invoice | ||||
| I.O.U. / Promissory Note | ||||
| Other (describe) | ||||
| Other (describe) | ||||
|
Totals |
($) |
(%) |
($) |
($) |
3. Pinpoint reasons (e.g., cause & effect)
● For example, is the main problem revenue? Or expense? A combination of both?
● Is your price lower than your cost?
● Are most sales invoiced?
4. Research business drivers (i.e., for the reasons pinpointed, what is causing the adverse impact?)
● For example, why is your price what it is? Why are your costs what they are? Why are sales invoiced?
5. Create alternatives (i.e., how to counter the adverse drivers and conditions)
● For example, improve the value-proposition of your product; reduce costs; migrate payment for sales up the chain toward cash.
6. Recommend an alternative (i.e., all things considered, pick the path that addresses the biggest issues and has the best chance of success)
Base the recommendation on your specific situation in terms of products/services, competition, market-leverage and strategic goals. Pick the overall best alternative.
7. Decide. Yes, this must be done.
8. Act. Yes, this is important.
9. Monitor. As we all know, things change. Was the analysis right? After making the changes, is Cash Flow improving? What other opportunities or issues begin to appear? Are you on track?
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 31
Copyright © 2009 Integrated Profitability TM
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