Manage for Cash

Planning of the working dayAt the sharp end of things is the need to manage for cash. If you can’t pay your bills, no matter how profitable you are, you will crash and burn. There are many tactics that can improve cash flow. Some of these are short term and one-off measures. However to resolve any cash crisis you must have the right valuable Formula and you must operate the business sensibly. Think of it this way – you can only squeeze a lemon once, but if you work on growing a healthy lemon tree there will be a sustainable supply of lemon juice, hence the need for the right strategy and operations.

Getting your Balance Sheet Right

Many businesses have a poorly structured balance sheet and pay the price for it.

i. Gearing is more important than ever

Assets are financed from either debt or equity and the right balance is needed.

  • As things get tight, try and move your balance sheet to a lower gearing (more equity and less debt) as this reduces risk and also reduces the servicing costs.

ii. A debt free balance sheet is sometimes described as lazy

The Return on Equity can be increased with the judicious use of debt. It is a question of getting the right balance.

  • A good calculation to look at is your interest cover which is the number of times your profit covers your interest expense. Higher levels of debt can be tolerated when the business is profitable and has high interest coverage. Certainty of earnings becomes very important and this takes us back to your valuable Formula and how robust this is.

iii. Asset funding

A big use of debt is asset funding and doing this the wrong way can lead to problems.

  • Assets should be funded within the lifespan of the asset, in particular those with short life spans.
    There is nothing worse than still paying off a loan relating to an asset that has worn out. It is
    important to match the asset life to the funding cycle.
  • Conversely, paying off assets quickly may draw too much from free cash flow and restrict other
    business development activities. Many businesses pay for assets, such as computers, out of cash flow
    and over time that can be a lot of working capital.

Sales Lead to Cash Cycle

Sales lead to cash cycle is defined as the time it takes from marketing a product to banking the cash from the sale of that product. Put simply, it’s the number of days from initial investment (marketing) to payment in full. This is often quite a long time. There are many steps in this process and responsibility passes through several sets of hands. It is quite natural that there is slippage, down time, duplication and things missed. All of these things create opportunities to make efficiency improvements.

Supply Chain Management

The other side of the business relates to your purchases, inventory management and work flow. This is Supply Chain Management and typically there are operational efficiencies to be had but usually not as many as on the credit side, most managers watch this side of the business pretty carefully. However there are improvements possible from the use of technology and management information that can help substantially.

i. Improving your relationship and terms of trade with suppliers

Trade suppliers are an important source of finance. Even more importantly, they supply you with the goods and services you need to supply your customers. And you, along with many other businesses, sit in an industry supplier chain. The efficiency of that supplier chain impacts all your viability and competitiveness. It is said now with globalization that real competition exists not between individual businesses but between competing supplier chains.

ii. Inventory management

There are significant costs to holding inventory including financing costs, space requirements, stock obsolescence, damaged stock and pilferage.

iii. Work flow improvements

How well you go about your normal business can have an impact on business performance. Every business provides goods or services in some form and the delivery of these involves work flows (processes). Once again advances in technologies, readily available work flow solutions (usually built specifically for an industry) and a work place culture of customer centricity can all lead to improvement in efficiencies.


Three steps for managing through a financial crisis: Your Valuable Formula, Modify Operations, and Manage for Cash.