Practical Tips for Managing Cash

Tips for Managing Cash

Managing Cash and Working Capital continues to be top of the list of tips of effectively managing the finances within the business.

Whilst we all know “cash is king”, it is not unusual for small businesses to struggle with their cash flow management.  You might well know how much is in the bank today, but do you know what that is likely to look like in 1,3, 6 and 12 months time?

From my perspective as an experienced CFO, this  isn’t just relevant in a crisis, but effectively talks to what best practice cash flow management would ideally look like all of the time. Which positions you well for when the pressure is on.  It’s all part of building a resilient business.

Why Cash Management is Important

A few recommendations I wanted to share:

1. Improve visibility of the critical numbers
   • Most important thing is to have numbers you can rely on
   • A robust cash flow forecast is absolutely essential, and not a nice to have
2. Quickly strengthen the cash culture within the business
   • Talk cash across all levels of the business
   • Talk implications of actions and decisions on cash
3. When things get a bit sticky, know what your potential scenarios and options are
4. And, consider everything – don’t leave any stones unturned
   • go through everything in your Profit and Loss and balance sheet to see where you might be able to get some leverage
   • eg; debtor or inventory finance, sale and leaseback of assets

A sign of a good business is how quickly bad news travels to the top.
As the Director, Owner, CEO or CFO you want the heads up sooner rather than later. If you don’t know you have a cashflow squeeze until a sub-contractor calls you directly asking where his money is, there is something very wrong.

What does a good cashflow forecast look like?

1. It’s robust, accurate, reliable and can be updated quickly for changing scenarios. I learnt from my mistakes here of engaging someone to build us a cashflow model. It was so complicated that none of us understood the formula to be able to amend it! We reverted to building our own Excel model that we all understood & could quickly update & amend.
2. Forecast at least 3 months ahead, ideally more and at various levels of detail. I am used to operating with a high level 12 months forecast, supported by detail for the upcoming month and even more specifics for the week and days ahead. This served us well to be have visibility on the peaks and troughs that get hidden in monthly numbers, and be able to manage them accordingly.
3. Ideally linked to your Profit and Loss and balance sheet, and other operating systems so that it reflects eg: the reality of your debtors collection cycles and your creditor payment terms, milestone billing points within contracts etc.
4. It’s built from the bottom up with detailed underlying assumptions that correlate to what is actually happening in reality, and not in theory.
5. Make it “bankable”
   • Early in my CFO career I was introduced  to the concept of a “Bankable Budget”. A budget that the Bank would be happy with because it has 80% chance of being realised.  We used this concept a lot to test the credibility of our budgets. Bullshit and wishful thinking aren’t helpful.

Building Cash Reserves

Further,  nurture relationships with your bank and use them as your first point of contact.  Find the best person you can within the bank who understands your business and is prepared to go into bat for you.   From my experience it made the world of difference. Ideally you want to be in a situation where your banking relationship protects you from the credit guys.   And I always found that having  proactive open communication with the bank served us well.  But there is a bit of an art in packaging your request, and information provided to the bank in a way that makes it easier for them to help you.

If numbers are all a bit of a mystery to you, let me help you unravel that mystery and coach you through knowing what you need to know to make informed business decisions, leading to better business outcomes. Either reach out for a chat or register for a forthcoming workshop.

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