SMB Cash Flow Management – More Than Just In & Out

It takes conscientious effort and careful planning to properly manage cash under any economic conditions, but cash flow management becomes particularly critcal in a down economy like the one we’ve been experiencing over the past 5 to 6 years.  Cash is the lifeline of your business.

History is littered with promising companies that never reach their potential (or go under) due to improper cash flow or fiduciary management.  As they say in professional sports, “offense sells tickets – defense wins championships.”

For enterprises of all sizes, figures and reports from good revenue numbers and income statements may earn oohs and aahs, but it’s cash which ensures that the company continues as a going concern for another year.  Like anything else in finance and accounting, you have to take some initiative and get little creative for optimal results.  Read how one small business owner made strategic and tactical changes when his cash flow situation became less than desirable in Entrepreneur magazine.

We utilize a few rules of thumb at PARR when it comes to effective cash flow management.

  • Understand your business cycle – historical ebbs and flows and why they occur
  • Plan and forecast both accrual and cash P&L – short and long-term
  • Have a clear view of cash in and cash out – a master planning document or spreadsheet is often helpful to get a bird’s eye view
    • Cash in – by customer.  Understand their contractual obligations, as well as historical behavior
    • Cash out – by vendor.   Understand your contractual obligations
    • Reconcile. Note the variances against the plan; adjust the overall plan for the remainder of the year as appropriate
    • Ensure proper credit facilities are in place in case of misstep
    • Communicate, communicate and communicate – applies to upper management as well as line managers

Cash flow management is an exercise in risk management.  It is necessary because businesses must stretch and leverage their assets for greater return.  When done properly, cash flow management should be in complete synch with invoices that go out and bills that come in.  Your CFO or finance manager becomes a conductor in an orchestra that makes beautiful music.

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About Richard Lee
Experienced finance and operations professional. Currently partner in five companies, adjunct professor of economics at Columbia College and executive contributor to a small business blog (www.SMBmatters.com); following corporate finance, M&A and management consulting tenures with Orbitz and Diamond Technology Partners; and six years of service with the United States Army.

One Response to SMB Cash Flow Management – More Than Just In & Out

  1. DivaCFO says:

    Great picture! We love “wordles.” Thanks for the follow!

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