If you’re a sports fan and spent part of the holiday season enjoying some of the action, you could not help but see the commercial where the actor references a survey that indicates 99% of his people surveyed favor cash, with 1% dissenting. I know the people I come in contact on a daily basis are in the 99% group, but why is it such a challenge and why does it seem so elusive?
We are all familiar with the term “Cash is King”. If we have cash we feel empowered within our businesses and are confident in the growth and success we have achieved. However, even when our business is profitable and our Financial Statement indicates we are successful, the inability to accumulate cash is often puzzling. There is always the next payroll to fund, rent has to be paid, and the supply chain has to be managed.
A Few Tools for Understanding Cash Position.
- Do you maintain a 12 week rolling cash flow model? This a relatively simple tool that can give you substantial comfort understanding your short-term cash demands. Once you set up your model, it can be maintained in a few minutes each day or week, but provide invaluable information. Also, providing this information to your banker will give them great comfort you are managing your business effectively.
- Do you track your Accounts Receivable Aging and related Days Sales Outstanding (DSO)? We understand “Cash is King”, but so do your customers. If you neglect to follow industry “best practices” in your collection efforts, your customers will take advantage of you. Rarely does anyone do business because of favorable credit terms. Your customers demand high quality products, on time shipping performance, and good customer service. Why shouldn’t you demand to be paid in a reasonable timeframe?
- Have you optimized your Inventory stocking levels? Sales professionals usually fear they will lose sales if products are not available when customers demand them. Purchasing departments usually fear the wrath of management if they shut the plant down because the run out of material. Although both these situations may be true, a good lien manufacturing strategy will consider these scenarios while minimizing your investment. If you maintain an extra $1 million in inventory because you can’t trust your supplier to deliver on time, you have just reduced your cash position by $1 million.
Whether you are a startup business or a $50 million manufacturing operation, it is always good to actively manage your cash. Understanding the elements within your cash cycle and how you can effectively manage them is important for the financial health of your business. As the actor asked in the TV commercial, “Who likes cash?” I know I do.