Cash Flow Management

Cash Flow Management – ENT650

Once you have developed a cash flow forecasting module, management of it is where you can see where your projections meet reality. Cash flow management is like pinching pennies. You pinch today in order to have reserves for tomorrow to handle those shifts in revenue. But even more than just being frugal, Rogers and Makonnen believe that it includes “…making somewhat complicated decisions about delaying payments to a supplier in order to use the cash resources to temporarily increase production.” (2014, pg. 85) A delay in payment will allow you to float cash for a short period of time, but you will run the risk of insolvency by not paying your obligations when due. Inc. suggests that “Insolvency is the primary reason firms go bankrupt; [whereas] efficient cash management means more than just preventing bankruptcy. It improves the profitability and reduces the risk….” There is a tight balancing act between outflows and inflows to ensure proper cash flow management.

Mismanagement of cash flows creates a bundle of problems for start-ups which include inability to: support consumer demand, manage unforeseen costs, limits growth potential and creates a high turnover rate. These are just a few examples of a slow drain on cash flow that dehydrates the lifeline of the business.

In a case study originally conducted by SmartCompany.com.au, Emily Ross gives best practices for managing cash flows in a “Cash flow boot camp checklist.”

  1. Focus on sales and debt management
  2. Create a cash flow boot camp checklist with clear payment terms
  3. Find a great accountant for daily monitoring
  4. Chase early, not later by setting clear payments goals
  5. Communicate, communicate, communicate – be transparent when talking fees
  6. Get disciplined by issuing timely and correct invoices with follow-up
  7. Hedge your bets with a mixture of long and short term payments
  8. Spread out payments to decrease default of total debt owed
  9. Take further action with debt collections

I believe Inc. sums the cash flow management task when it suggests, “The key to successful cash management, therefore, lies in tabulating realistic projections, monitoring collections and disbursements, establishing effective billing and collection measures, and adhering to budgetary restrictions.” For a new entrepreneur, enlisting the help of an account or accounting software with help to manage cash flows so that you can make profitable decisions about funding your business.

RESOURCES

Cash Management. (n.d.). Retrieved September 21, 2017, from https://www.inc.com/guides/finance/cashmanagement.html

Rogers, S., & Makonnen, R. (2014). Entrepreneurial finance: finance and business strategies for the serious entrepreneur. New York, NY: McGraw-Hill.

Ross, E. (n.d.). Entrepreneurs reveal their cash flow advice. Retrieved September 21, 2017, from http://www.business.vic.gov.au/case-studies/entrepreneurs-reveal-their-cash-flow-advice

 

Cash Flow Forecasting

Cash Flow Forecasting-ENT 650

Financing for your company can be determined by preparing a cash flow forecast. Your financial needs can be managed much better when this forecast in place. “The forecast will tell you if your business will have enough cash to run the business or pay to expand it. It will also show you when more cash is going out of the business, than in.” (Business Victoria, 2017) Financing needs can change due to short term growth such as holiday or seasonal sales and long-term development for expansion due to demand which also will require an increase in employees. Repairs or new equipment also need to be taken into consideration. (Rogers & Makonnen, 2014)

Forecasting is about the future. Your future sustainability and your future growth. Forecasting for an existing business starts with the previous year’s sales. For a start-up, an estimation or assumptions will be used. By estimating all your expenses or outgoing cash, you will be have a better picture of the sales or capital needed to cover the expenses. A three to five year plan is a good start.

Outflows and Inflows will look different for the type of business. Below are just a few considerations for each category given by Business Victoria.

OUTFLOWS INFLOWS
Operation expenses Rebates and refunds
New assets Owner investment
Loan repayments External grant funding
Payments to owners Sale of assets
Investing surplus funds Royalties

Once you determine what capital is needed, another important consideration is when to obtain it. Rogers and Makonnen offer two common practices-Series of Funding and All Funding at One Time. Series is getting “only what you need year to year… [and All Funding] is that you should get the maximum that you will need at once.”(2017, pg. 84) Both offer uncertainties, but the determination is based on the confidence you have in the forecasts.

Accuracy in forecasting is crucial for cash flow management. You are not only looking at the inflows and outflows, but also timing. Your projections determine your success and growth. Part of the process also includes checking actual results with what has been projected, which we will take a closer look at in the Cash flow management blog.

Resources to help you manage this process include software packages like Quick Books and Excel Templates.

RESOURCES

State Government of Victoria. (2017, July 21.) Cash flow forecasting. Retrieved September 20, 2017, from http://www.business.vic.gov.au/money-profit-and-accounting/getting-paid-on-time/cash-flow-statement-projection-with-template

Rogers, S., & Makonnen, R. (2014). Entrepreneurial finance: finance and business strategies for the serious entrepreneur. New York, NY: McGraw-Hill.

Bank On You

The life-line for creating a successful start-up entails securing capital. Be it your money or someone else’s, the financing of your big idea or dream translates into cash flow-in and out. Maybe you have been saving for this new venture or you are enlisting financial support from venture capitalists or angel investors. Another alternative funding source could derive from a financial institution. Any external funding support will require that you prove your ability to be trusted in order for risk to be taken by others. You can risk your own money at your expense, but when you enlist the help of others, your dream becomes their expense or profit.

You, the entrepreneur are the key factor for debt or equity financing. What makes an entrepreneur attractive for risk? “Ideally, investors prefer people who have both entrepreneurial and specific industry experience.” (Rogers and Makonnen, 2014, pg. 2) Investors are more comfortable with those who have the know–how to make it work. It is similar to applying for a job. The employer may require a certain degree level and years of experience or the years of experience in lieu of the degree. They want to see a proven track record of success.

RATING EXPEREINCE
A Entrepreneurship and industry
B Entrepreneurship or industry
C No entrepreneurship or industry

Table 1-1 (pg. 2)

 

Investors rate entrepreneurs with an A, B, or C depending on experience. The table above taken shows how these ratings are determined. An A rating is given to a person who has “…experience as an owner or even an employee of an entrepreneurial firm and also experience in the industry that the company will compete in.” B rated entrepreneurs “…have experience either in entrepreneurship or in industry, but not both.” (pg. 2) The C rating, which is least desirable, with no entrepreneurial or industry experience, sends a red-flag to investors. No history in business says that you are still a dreamer.

Position yourself for favorable outcomes. The life of your business depends on your expertise. A race car only experiences the checkered flag because of the driver’s practice, passion, and pursuit. Even though a race car only has a seat for one, the help of the pit crew (management team) creates a winning situation for everyone. But it is you, the driver, which everyone is banking on to come across the finish line first. Bank on you to make the business successful and others will bank on you too.

RESOURCE

Rogers, S., & Makonnen, R. (2014). Entrepreneurial finance: finance and business strategies for the serious entrepreneur. New York, NY: McGraw-Hill.