Best practices to bolster cash flow

If cash is king, are you giving management techniques the royal treatment that they deserve?


How many times in each week does one hear the term, “Cash is king”? We’re betting, quite a bit. Before one rolls his or her eyes at this trope, how about also considering the comparatively fresh and exciting notion of “Cash flow is queen”?

Of course, we know that the former, overused phrase refers to how cash is perceived to “reign” over all other types of investments – from stocks to bonds. We hear it even more often when securities are high, and investors are pocketing cash for when prices drop. The trope itself was reportedly popularized following the 1987 global stock market crash, when then-Chief Executive Officer of Volvo, Pehr G. Gyllenhammar, reportedly said it for the first time. Ever since, “thought leaders” and business giants alike have been fond of jumping on Gyllenhammar’s bandwagon – be it Jack Welch (Mr. GE), Alex Spanos (of Los Angeles Chargers fame) or Dave Ramsey and his exultation of: “Debt is dumb. Cash is king.”

Robust cash “flowing in” allows a business more flexibility when it comes to making wise moves and when exploring potentially smart investments. Jad Baji of Amsterdam-based JAD Consultancy offered a twist on cash flow and the terms we’ve heard so many times before, claiming he invented an equally regal metaphor, “Cash flow is queen,” to convey that the “queen’s” (cash flow’s) primary role is to organize daily duties and engage with the public. So, in turn, cash flow is all about managing the consistent and nearer-term inflows and outflows to cover the most pressing or present needs of an organization.

Following through with the metaphor, the “king” (cash) is primarily tasked with managing the strategic planning. Conversely, cash as king is tasked with the mid- to longer-range strategies, with an eye on those efforts to financially cover future-focused and forward-focused goals and objectives.

Techniques to manage your “kingdom”

Fundamentally, cash flows in any moment reflect the difference between the cash that is available at the start and at the end of each accounting period.

The cash that must be accounted for may include the likes of:

  • Proceeds from loans

  • Income derived from investments

  • Sales of assets

  • Operating expenses

  • Direct expenses

  • Principal debt servicing

  • Purchases of assets; for instance, machinery

We tend to say that those businesses which are profitable only on paper are “cash poor.” This situation demands a strong financial partner like our team, O’Donnell, Ficenec, Wills & Ferdig. Recognizing the dangers and potential problems is a promising start and big leap toward positioning your business for sustained performance and profitability that is real, and not just “good on paper.”

For starters, cash flow analysis may be performed to assess the “gas” (cash) that makes your business flow or run at a healthy, sustained clip. We can clearly survey how cash is moving through one’s business. This cash budget” strategy can then be used to identify patterns or trends that account for how money flows in and out. Additionally, the comprehensive statement of cash flows” approach involves taking a deeper dive into the last two years of the business’s balance sheets. The differences between these balance sheets are then compared to develop the statement.

Analysis of the cash flow statement/statement of cash flows generally explores both the sources and utilization of the funds from the balance sheets that were compared. This analysis presents valuable forward-looking insights. So, business leadership can better quantify and articulate their needs for cash in the future.

One of the most valuable aspects of the cash flows statement is the calculation of “free cash flow,” which is the cash a company has left over after it pays for new facilities, facility upgrades, technologies and other capital expenditures. Free cash flow may be characterized as the “gold standard” indicator of a business’s financial status. FCF analysis can be augmented to general cash flow analysis as means of strengthening the quantifiable tools available to you. In turn, one garners a better idea as to the business’s footing, which can then be applied to drive smart decisions going forward. So, it can be a vital form of business intelligence.

While there are numerous ways to arrive at FCF, the most straightforward approach is likely to subtract one’s total capital expenditure price tag from the operating cash flow figure.

Adjustments can also account for differences in how businesses may list the likes of capital expenditures and cash flow for ops; for instance, other equations can be used to derive much the same results:

  • Sales revenue, minus operating costs and taxes, minus required investments in operating capital

  • Or, net op profit (post-tax) minus operating capital net investment

Notably, one of the biggest takeaways here is that free cash flow may present a stronger indicator of certain organization’s financial health; for example, when assessing the metrics associated with those “non-financial” ventures – ranging from manufacturing to service firms. The best approach or calculations for one’s respective business come down to consideration of unique factors such as the types of long-term fixed assets (from land to structures to inventories) that go hand in glove with operating the enterprise within a given industry or market space.

Buoying cash flow

Some general methods simply present good ideas for businesses to get into the habit of doing, especially if those businesses are relatively new, in active “growth mode” or clearly do not have adequate levels of working capital at their disposal.

Smooth cash flow can be precipitated by abundant working capital, which supports investments in greater resources, increased production, and the coverage of outflows. That old chestnut of what gets tracked or measured gets managed very much applies here. Every aspect of the business that touches monies in some way deserves a set of “eyes” on it. Additionally, do not let such scrutiny wither on the vine. Routinely monitor for spending and receivables alike. With a good handle on the cash flow, our clients can then work in partnership with us to improve upon that key indicator. Potential sticking points, such as large expenses that could really put your cash flows in a bind, can be identified and adjusted with appropriate “fixes” in a proactive manner. No ugly surprises here!

Inefficiencies are often synonymous with drains on your business’s ready cash. So, those areas that are not efficient must be pinpointed and addressed. For instance, assess those overheads to see if money is being spent unnecessarily on day-to-day operations. Likewise, one can free up monies and operate more efficiently by selling off outdated or irrelevant technologies or assets. The capital that is afforded by such a step can result in the ability to invest in more forward-thinking, growth mode investments – from fresh talent to new technology to expand and enhance the business.

Be mindful of not being a “Scrooge.” Continued investments in talent and resources can seem counterproductive at the outset but will be vital to acquiring new customers and partnerships, and to bolstering existing customer loyalty. This ultimately leads to elevated profits and more inflows, which have a way of taking care of those pesky cash flow issues and operational inefficiencies and snags. Just as one’s personal wealth management starts by setting aside rainy-day funds, the same principle must apply to one’s business. Take care of those potential emergencies first. So, when the bullish times inevitably cycle down, a bear market doesn’t crush you and your operations.

Yet another classic strategy to incorporate may involve encouraging customers or patrons to pay for your services upfront or before the end of invoicing periods. Techniques to speed payment processes may involve sweetening the pot by extending incentives or discounts for early bird payments. Generally, this can make a big difference in boosting cash flow to new heights by allowing for greater access to cash to aid in business ops, employee compensation and the reinvestments that also take your business to new heights.

Cash flow need not be over-thought. We know you have enough on your plate as it is. But a little foresight on this front can result in far less sleepless nights over the longer term and can pay off in a big way by sustaining the profitability of your business far into the future. And, of course, it helps to have a partner on your side who is fluent in often complex financial language to navigate the process on your behalf and for the good of your team. Contact OFWF to get off on the right footing or accelerate your business forward.


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