You can’t fix a problem you can’t see
As discussed in my previous article, cash flow mismanagement is a common problem among small and mid-sized businesses. Many owners do not have the experience to precisely pinpoint where cash flow mismanagement has occurred, nor the background to develop plans designed to counter those cash flow issues.
Cash Flow Analysis and Financial Statements
A typical small or mid-sized business owner can spend hours examining his or her company’s financial statement, and nevertheless fail to see the underlying causes of cash flow problems, whether they be mismanagement of receivables, problems in pricing strategy, erosion of margins, escalating operational costs or other cash flow problems.
Reviewing the same financial statements, I will spot red flags in cash flow that to my eyes just about jump off the page. The experience I’ve gained as a high-ranking officer of corporate finance departments makes the errors almost instantly recognizable.
What’s more, having witnessed similar cash flow problems countless times in my years as an Interim CFO, I can not only pinpoint the problems, but expeditiously lay out a strategy the business owner can employ to help counter the cash flow quandary.
Of course, helping business owners recognize and overcome a cash flow management problem they are currently experiencing doesn’t necessarily help them down the line, when problems with cash flow are likely to crop up again.
Learn to Read for Cash Flow Issues in Financial Statements
That’s why I take the time to teach the business owners with whom I work how to accurately “read” their financial statements for potential cash flow red flags. I can show the owner I’m counseling what lies behind those numbers. Those business owners who are serious about understanding their own financial statements begin to have their eyes opened to cash flow threats. They come to more fully grasp what they should be looking for in financial statements as the enterprise evolves.
Build a Custom Financial Reporting Template
For many business owners, I also build customized templates specific to their individual businesses. Each template provides a schematic that enables critical figures to be pulled from the company’s financial statement and more carefully tracked over time. The template is a way of ensuring a current problem doesn’t become a recurring one.
Does your company have cash flow problems that would benefit from analysis? Put me to work and I’ll ensure your small cash flow problem doesn’t become a fatal one.
Read on to learn the common ways cash flow is mismanaged — and what CEOs can do about it.
An all-too-common source of trouble for small and mid-sized businesses is the failure to successfully manage cash flow. Cash flow is the lifeblood of a business, and if it’s not managed properly the company won’t survive for long.
What are the most common ways cash flow is mismanaged?
Cash Flow Mismanagement: Receivables
The trouble begins with failure to adequately manage receivables. When receivables get out of hand, running 60 days or more, your customers are using money that should be yours.
That cash flow failure in turn leads to trouble paying your own suppliers and vendors, who may respond by asserting that if they are not paid in a timely fashion, they are going to start shipping goods cash on delivery. The message from those suppliers essentially is, “We’re not going to be your banker.”
Cash Flow Mismanagement: Pricing Strategy
Cash flow management problems can also result from the inability to price your goods and services correctly.
In many cases, companies experiencing problems are under-pricing products and services. Even a tendency to slightly under-price can cause cash flow problems over time, as that slight differential inexorably builds up to a substantial cash flow shortfall.
Compounding the problem, this cash flow situation cannot be quickly rectified. The difference can’t be made up in one price increase, as it will likely be too much for customers to tolerate. Reviews of pricing must be tackled on an annual basis.
Cash Flow Mismanagement: Paying Attention to Margins
Companies tracking cost of goods sold, or cost of sales, must recognize those are direct costs — such as raw materials and subcontracts — related to sales. Accept a price increase from one of your vendors, and your margin has just been eroded. That can only be overcome by cutting costs elsewhere, or increasing pricing.
Whether you cut costs or increase prices will vary on a case-by-case basis, but either scenario presents obstacles. Most small businesses are hesitant to hike prices. But conversely, there are only so many ways you can cut costs.
If cash flow problems are not addressed, they will only fester and become even bigger issues. Typically, cash flow management issues result from inexperience. The business owner has no experience in analyzing cash flow problems. That‘s why it‘s important to either consult with a seasoned expert in these matters or hire an interim CFO. I’ve dealt with scores of companies with cash flow challenges, and have been able to counsel CEOs in making strategic financial decisions that have altered their companies’ fiscal trajectories.
Does your company have cash flow management issues? Let’s address those problems together, before your company’s lifeblood is drained.