Cash Flow Management

A cash flow management brief history.

“Cash is King!” You probably have heard this old saying many times. Before there were ERP systems, computers, green ledger paper, balance sheets, profit & loss statements, and sales or manufacturing reports, business entities managed cash; cash in, subtract cash out and count what we have left at the end of the day. We now think of this concept as accounts payable and accounts receivable. This simplified cash management approach worked for thousands of years and led us to our modern business owner’s cash flow forecasting.

However, vendors or manufacturers over the millennium did not have complicated processes to manage future cash flow that heavily impacted their cash positions. In the past, it was probably as simple as do I have enough free cash flow to buy the goods or raw materials needed to meet the short-term demand for my products. For agrarian societies worrying about the weather and the next harvest was a more significant concern, but those issues were driven by nature of which they had no control. Planning for the next 12 weeks or next year was probably a nonsensical exercise for most of them.

In today’s world, many more variables can impact our business. Some we have control over, and some we do not. We also have much more information available for future cash flow projections, which is a necessity today for planning financing activities. Knowing the incoming and outgoing cash requirements beyond the current month can still be challenging, but it is a necessary exercise to build and maintain a healthy cash flow business.

Four key points for cash flow management. 

Four main components are important to effective cash flow management. Where you find this information within QuickBooks or other sources is in blue text.

1. What is your net cash balance(s) today (cash reserve)?

QuickBooks bank account(s) ledger(s), assuming you keep up with bank reconciliations in your system.

OR

Your bank account(s) cash balance(s) – – from your Monday morning opening bank account(s) balances

1. What is the value of the outstanding checks, cash receipts, and deposits that have not cleared the bank account(s)?

No need to identify if you are using QuickBooks bank accounts reconciliation. The balance already includes not-cleared checks and the deposits you have initiated.

OR

Cash outflow – Value of the outstanding checks and deposits not cleared through your manual bank reconciliation

1. What are your operating expenses and the cash value of your commitments to your suppliers, including materials, services, leases, and rentals? When are the amounts and payments due?

QuickBooks: Report/Vendors & Payables/Unpaid Bills Detail

1. What is the value of your outstanding cash and actual sales to customers that still need to pay? When are the amounts due to be paid by them?

QuickBooks: Reports / Customers & Receivables / Open Invoices

Is that all businesses need for managing cash flow? Yes and no. Yes, for small businesses, only planning for a week or two. No, if you take a more systematic approach to mid-term cash management. The current week + the next 12 weeks on a week-by-week basis is a good cash flow forecasting approach. (Similarly, cash flow projection is often forecasted for the next 12 months)

You also need to have reasonable estimates of the following:

1. Value of sales and their timing over the next 12 weeks. You have to develop an incoming cash flow stream from the payment terms offered to your customers. Use the pattern of historical payments from these customers for the 12 weeks. This data is not what is already in your QuickBooks Accounts Receivables.
2. Value and timing of any non-sales receipts expected week by week over the next 12 weeks. Again, these are not in QuickBooks, but these could be purchase rebates, tax or non-tax refunds, interest or investment income, etc.
3. New liabilities you expect to commit to for goods, materials, or services you need to buy to support the projected sales in #5 above. You must determine an operating cash flow stream to the vendors for these expenses weekly over the next 12 weeks. This figure would include normal inventory replenishments. Again, this is not what is already in your QuickBooks Accounts Payables.
4. Value and timing of any non-vendor payments expected week by week over the next 12 weeks. Examples include insurance, rent, leases, services, tax (federal / state / local), loan repayments, credit line repayments, credit card debt, capital investments, owner’s distributions, etc.

Small business resources – Cogent Analytics’ Cash Management System (CMS)

An excellent cash flow management tool to bring all of these sources and estimates together is Cogent Analytics’ Cash Management System (CMS). Unlike QuickBooks, CMS is based on Excel and gives you the flexibility to build a 12-week cash flow forecast quickly. Then you can easily update it on a week-to-week basis. You can then see week to week when your available cash becomes low or becomes excessive. With positive cash flow, you can pay any delinquent accounts payable, repay credit lines, or roll some money over to short or mid-term investments.

Looking into cash flow scenarios. 

Now What? Now that you have a good handle on your incoming and outgoing cash over the next 12 weeks, what should you do with it?

Many scenarios can occur during the life of a business when it is cash-rich or cash-poor, and the different degrees of these extremes over time. The following are scenarios and actions you can take in varying degrees. This is not a definitive list, but it should help you determine your own solutions based on your positive cash flow or negative cash flow situation.

Note: the following are recommendations for companies that have been in good standing with their customers and vendors for some time. Different approaches may be needed if you have not delivered to your customers on time or are consistently late in paying your vendor’s invoice. Other extreme circumstances could be if you have gone through a bankruptcy process and your vendors require advanced payment. Another is if business owners are in bankruptcy proceedings. In this case, the court will decide what expenses are payable and what happens to your cash flow. Adjustments to these recommendations below also have to be made if you need help with on-time shipments of materials necessary for your products or if these suppliers require down payments for orders.

The Trail from Concern to Bad to Worse

Concern Scenario and Possible Actions

Let’s say you have a minimum available cash reserve that you like to maintain for your business. This scenario is based on your experience staying above this level in normal economic times, and you know you will be able to pay all routine liabilities and a few occasional unexpected ones. Once you see that you are going to be at this minimum level for a few weeks during the 12 weeks and you do not see anything on the horizon that will change this situation for the better, then you need to invoice outstanding debts and collect aging accounts receivable invoices. Also, delay any non-critical purchases. These should be your normal monthly activities for proper cash flow management.

Look at your cash inflow and see if you can call customers who are slow to pay or often pay right at the end of their payment terms. Although you may value all of your customers, some are better than others. The better ones pay on time without the need for reminders. The great ones pay early without you asking. Don’t bother them. Let them continue with these practices.

The others can range from needing a simple late payment e-mail reminder to frank phone calls to collect on your sales. Turn over the worst ones to collection agencies. Some of these may be playing the game of waiting for your reminders, while others may really have a cash flow problem. These slow-pay or late payment customers are actively managing cash flow at your expense. It is always best to keep on top of them and keep the funds coming in. It is particularly important when you need incoming cash.

Look at your cash outflow to your vendors as well. Are you paying exactly on time or early? If early, then are you capitalizing on any early payment discount incentives? If not, why are you burning through your funds to pay early with no benefit? In this Concern Scenario, pay precisely on time. Consider giving up the early payment discount if you are getting into cash flow issues.

Resolve disputed receivables or payables, particularly if you think you are in the right and the settlement will be in your favor from a cash equivalent perspective. Sort them out.

Ensure your production people are ordering sensibly and controlling overtime. Order solely necessary materials and allow only needed overtime.

Look at delaying any unnecessary expenditures. Focus on the immediate business needs, but don’t create alarm in the organization.

Bad Scenario and Possible Actions

If your weekly cash flow projection shows your working capital will be close to zero in some weeks, and you have already taken the actions in the “Concern Scenario” above, then more deliberate steps are required.

Make calls and try to pull up payments from customers with whom you have a good relationship. Focus on those who have done the same to you in the past in delaying their payments. This approach is the give-and-take that often occurs in business relations.

If you are in a cash-on-delivery business, look at what you can deliver before the delivery due date. You should know your customers well enough whether you can do this without notice or if you need to make prior arrangements with them. Business owners can argue that you have a big order booked and need to free up warehouse space.

Look at the accounts payable cash outflow and see if you can stretch out paying suppliers beyond the payment terms. If you only need to do this for a few days beyond the due date, you likely do not need to communicate this with your suppliers.

If you buy a lot of raw materials, see if you can make consignment arrangements where the supplier maintains the inventory you will buy in a controlled system at your location, and you are routinely invoiced as you use the material. You own the material when it is invoiced and not when it arrives at your dock. The supplier then sends replenishments when their inventory reaches a specific level. Once in place, you can use this system in good times as well for you to reduce your working capital.

Stop ordering office supplies. If you ever walk around your business and notice what people have in their desks in addition to the office supply cabinets, you may be surprised by the inordinate number of pens, pencils, paper, staples, etc. Inventory what you have already bought. I’ll bet you can go for months without making normal order replenishments.

I know of one Fortune 100 company that even encourages employees who travel overnight on business to always take the complementary pens and notepads from their hotel room and use them back in their home office rather than using the company-purchased supplies.

Reduce overtime even more than before.

Actions that will support cash balances later in the 12-week CMS:

Like the cash-on-delivery scenario above, see if you can advance shipments on orders on hand to start the payment terms clock.

Let’s look at some tricks to managing cash flow. Delay inventory replenishment purchase, particularly where you have more than adequate stock for the next 12 weeks, and revisit this each week as you update your CMS. Only order items required to meet current or very firm expected orders or long lead items. Review orders with your key purchasing office and plant people in short team meetings daily. This review gives the organization a sense of urgency but does not make it look like the ship is sinking.

Renegotiate your payment terms on payables. The old 30-day terms are what suppliers want, but many have already accepted 45 days. Many large companies push their weight around and require 90 days or more because their suppliers rely heavily on their sales. You may not be able to extend them that far but consider negotiations.

Delay any expenditures that are not absolutely necessary.

• Forget about buying that nice new office chair that replaces one that is still quite functional or swap it out with a good one that is currently not used.
• New carpet? Can’t it wait?
• Do you need to order that new equipment that requires a down payment now? Consider leasing equipment.
• Fix the 100% owned delivery truck rather than buy a new one through a loan this month.
• Patch the parking lot potholes or repair that leak in the roof rather than commit to replacements at this time.
• Cut the grass and deal with the landscaping every two weeks instead of every week.
• DO EXPEND MONEY needed to keep your employees safe – ice removal or snow plowing, but see what can be done with your crew on straight time.
• Delay any distributions to you as a business owner. You may have loyal employees, but you will be surprised how nasty rumors get started from anywhere in the company, including the accounting department. Be a leader!
• We can recommend many more examples, but you get the idea.

Consider drawing on your credit line to meet required expenditures if you see this as a temporary problem.

Moving into a Worst-Case Scenario & Recommended Actions

Again, assuming you have already taken the possible actions above.

No overtime or bonuses.

Reduce those extra shifts you added in the good times down to what you require for ongoing orders. Also, SG&A staff too.

OR

Assuming you are not restricted by union rules, reduce the work hours across the board for hourly or salaried non-exempt people. Reduce salaries in the same proportion for salaried people, including your own. You are all in this together. Reductions must be in line with your expected shortfalls in cash.

In either of these cases, reorganize your people to get the required work done. Some will need to do double duty. Be present and supportive. Make sure they get what they need to get the job done.

AND

Develop a confidential plan to layoff workers and office staff beyond cutting out the extra shifts and overtime above. Layoffs are the beginning of cutting to the bone in the Worst-Case Scenario below. Determine your labor by the amount of payroll expense you believe you can handle with short- and longer-term cash inflows. The available cash intake from this plan may be substantially reduced compared to earlier times, and you need to be highly confident will occur. You can also build trigger points to implement in phases rather than take all actions at once. If you are non-union, keep your best and only those needed to keep the business moving.

If You are in the Worst-Case Scenario and Required Actions

Let’s say you are living day-to-day with your free cash flow and planning payments on payables based on the expected timing of projected incoming cash. You also took all other actions recommended above.

YOU ARE IN DEFCON RED – – PRIORITIZE!

Implement the headcount reduction plan you developed, as noted above.

Rank and prioritize daily actions to collect accounts receivable payments.

Clamp down hard on any expenditures people want to make. If you don’t think all of your people who can initiate orders understand the problem, move the approval authority up to you for all expenditures.

Talk to your customers about paying their invoices or following through with the agreements you have previously made with them as your available cash is deteriorating, but don’t alarm them to the point where they start sourcing your products from your competitors. You have leverage over those buying products unique to yours or if they are highly reliant on your products in a very tight capacity utilization or supply-strained market.

Rank, who is paid with available cash. Only make payments that are absolutely required. You are rationing your available cash flow:

1. Payroll (no OT or bonuses paid). You need to pay your workers on a timely basis. They are the lifeblood of your company.
2. Pay your taxes – payroll or otherwise. They are going to get their money one way or another.
3. Identify what material is absolutely required as well as those who are threatening to cut you off. Basically, if you are a big buyer from them and key to their business, you have leverage over them, and if you are a small buyer to them, they have power over you. Pay and ration your cash outflow according to these principles. Many suppliers will also welcome partial payments but communicate with them openly.
4. Renegotiate payment terms wherever you can. Negotiated payment terms are pretty much out the window in a DEFCON RED situation.
5. Negotiate to stretch out payment terms on operating expenses such as leases, rentals, loans, credit lines, insurance, etc. Renegotiate terms if you can.
6. See if you can delay utility service payments but pay them if this is not possible. You need power, water, sewer, trash or recycling collection, internet, and telephones to run the business.
7. Stop all unnecessary service. I know of situations where there were creative approaches to cleaning bathrooms, keeping the site-wide location clean, cutting grass, snow or ice removal (as mentioned before), light bulb replacements, energy savings initiatives, etc. Always come up with safe solutions.
8. If you have a silent financial partner or owner, pay them last. You also get in the back of the line for any special disbursements to yourself. Again, show leadership.
9. Do what you can to avoid bankruptcy. That is the last straw, and you lose total control of your business in that situation. However, if you don’t see the situation improving soon, consider declaring bankruptcy. Going further into debt with no way out is not a good situation either.

Communicate with customers, suppliers, and others as appropriate. Don’t hide in a clam shell.

Modestly Cash-Rich Scenario

Economic times are OK. Sales are meeting decent expectations, no anticipated over-the-top orders, and delivery of materials and cost of materials and services are stable—no major concerns around this for the foreseeable future. Your available cash flow from week to week is at or above what you believe is your minimum requirement to meet your short-term liabilities.

Stay on top of collecting accounts receivables and make payments on time to capture any early payment discounts. Pay your other liabilities on time. Also, pay down any credit line balances.

Be smart about cash flow management. Please don’t waste it but do carry on normally. Keep investing the money needed to keep the business going at the current level but be cautious about investing for significant growth if the economy could be stronger and the competition is intense. Recognize people with modest bonuses for outstanding performance. Take some money out for yourself as well, based on the business’s health. Be moderate on this, not overly aggressive.

Stronger Cash-Rich Scenario

Stronger growth in the economy is happening. Demand is increasing. You are working extra shifts and overtime to meet this stronger demand. The labor market is getting tight. Material prices are rising. Capacity is getting tight in your industry. Here is when you need to increase your prices to cover higher costs, but more importantly, the market will bear these price increases.

You should see more available cash over time if you manage your business well. Use some of the positive cash flow to pay off the credit line, pay off or restructure debt with much more favorable terms.

As these better times unfold, you need to develop a limited plan for expansion, either through adding more shifts, retiring old equipment, or buying new and more efficient equipment to utilize your space better and increase production capacity.

If things are getting really good, make preliminary plans to expand your site or to a new location where you can expand your market. If you need to improve your working capital position to improve your balance sheet in anticipation of adding new debt for expansion, consider factoring your receivables with a third party but negotiate a good deal.

Strongest Cash-Rich Scenario

Execute your growth plans. Follow through on the actions that can give you nearly immediate benefits for sales growth so you can use the idle cash to pay against the longer-term expansion plans. Use this time to move into regions where you need a stronger sales presence, and the opportunities look promising.

Always keep an eye on any developing headwinds in sales and adjust the plans accordingly.

The recap – better cash flow management. 

In closing, a company needs different approaches depending upon the direction of the economy, its markets, and the company’s evolution.

In addition to 12 weeks’ CMS, one thing not mentioned above is to have budgets for the P&L, Cash Flow, and Balance Sheet. You should do this for 12 months of the following year. It would help if you also forecast what you expect vs. what you budgeted for by month for the rest of the current year. As you improve with cash flow management and these tools, you should look forward to 3-year plans, including financials. Cash flow projections provide a good look into the future and set achievable goals you can track over time. Always remember that Cash is Still King.