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You run your business. Together, we will improve your cash flow.
Let me tell you a story…
It is a Thursday in August. This is the height of our season, and the company doesn’t have enough money to cover payroll on Friday. Sales are booming – yet we don’t have any money in the bank. I rank-ordered the receivables (not easy, given the manual system). The office manager starts collecting from our largest clients. By the end of Thursday, we will have enough money to cover the payroll.
The lesson here is that while sales are essential. Sales do not mean there is cash in the bank. This was my first experience when cash flow forecasting would have helped.
I later quit this job for another reason. I moved east and became involved in a large cash reconciliation.
Five months before I moved east, two multi-billion-dollar pension trusts merged. I signed up as a temporary employee to reconcile the cash discrepancies. While working this job, I discovered the other side of cash flow forecasting. This cash flow forecasting involves minimizing your cash balance. By minimizing the cash balance, you increase your return on assets.
Detailed Thoughtful Analysis
Cash flow is the lifeblood of every business. How healthy is your cash flow?
Your Cash Flow Solution Starts Here
The statistics are scary. Cash flow accounts for most (82%) of the business failures. Thirty percent of business owners stop paying themselves due to cash flow issues.
Cash is critical to business success. This means that monitoring your cash flow is crucial. To understand your cash flow, you need to know your Cash Conversion Cycle. How long is your cycle, and how can you shorten it to improve your cash flow?
To see the power of the Cash Conversion Cycle, consider this example. Your initial Cash Conversion Cycle (“CCC”) is 137 days. If you reduce the CCC to 46 days, the CCC has decreased by 66%. If your accounts receivable used to average $100,000, it will drop to $34,000. This releases $66,000 of cash flow. If you earn a 10% rate of return, you have increased your profits by $6,600.
If the trend is your friend, is your Statement of Cash Flow a friend or foe? What is the trend for operating cash? What is the trend for free cash flow?
Because cash flow is the lifeblood of every business, you must track your free cash flow trend. Free cash flow is the lifeblood of a company and also a measure of the company’s financial health. Finally, free cash flow serves as a true indicator of a company’s profitability.