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Managing the Ins and Outs of Cash Flow

(July 2006) posted on Mon Jul 31, 2006

Set cash-flow goals and execute a plan to achieve them.

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By Marty McGhie

When discussing measures of success in small business, we typically mention revenue streams and income generated by business operations. Too often, however, we neglect to focus on perhaps the key component of a successful business: cash-flow management. Admittedly, without revenues and income there exists no cash flow to actually manage, and the business will not survive. But good cash-flow management can have a significant effect on the success of your business.

In a previous column, I addressed how to create and use a statement of cash flow (editor’s note: see Oct. 2005 issue), which provides you with information on where the cash is flowing from and to. This time around, I’ll hit on the day-to-day management of your operation’s cash flow.

Developing a game plan
The first step in managing your cash flow is to come up with a plan. Just as you might regularly review financial statements each month or hold weekly staff meetings, you should also schedule recurring meetings with your managers and accounting personnel to discuss cash flow. Once you become proactive about discussing cash-flow management, it will become part of your regular business planning and review.

Cash coming into the business is, of course, your lifeline. Begin by setting expectations and goals, perhaps in the form of budgets, as to what your incoming cash flow should look like. For example, you can decide what your average outstanding account receivables should be. While an average of 30 days may be too ambitious (even if those are your credit terms), an average of 45 days outstanding might be more achievable and better work within your cash-flow plan.

In your cash-flow meetings, identify with your accounting department the amount of cash you expect to collect during the coming planning period, whether it be the next day, week, or month. This is necessary as you execute the other part of the plan-cash going out.

After you have set your cash-flow goals, execute a plan to achieve them. Whether it is one person full-time, one person part-time, or multiple people involved, you must dedicate personnel time to generating cash collections.

Next, set up measurements. Your accountant can help you identify trends and expectations by using a simple ratio such as Average Days Outstanding or Accounts Receivable Turnover.