Cash flow stability & predictability remains top management’s priority
Over the 20+ years or so in managing and advising businesses on various business issues and challenges; one of the most recurring discussion topics is cash flow & cash forecasting. Its importance is understandable as cash flow management represents one of the vital functions in any business, and ensures the business financial story remains stable and its value proposition viable.
Depending on the current business’s stage, focusing on positive cash flow has different aims. For businesses, just starting out imperative would be to quickly achieve profitability and positive cash flow as soon as possible. The reasons are twofold. Firstly, when companies are just starting, initial cash reserves are limited. The “race against insolvency and possible bankruptcy” begins from the day a business opens its doors to customers.
The initial stage is usually a period of constant cash fluctuation where initial business assumptions and the value proposition are tested and adjusted by market realities.
A second reason is related to servicing initial debts while building a credit and business reputation. Start-ups don’t enjoy favourable credit terms and usually don’t possess excellent bargaining power. In other words, the cash pile available needs to ensure smooth initial operations until the business can function on its own financially. Once a good credit history is achieved, better trading terms can be negotiated.
Military discipline, full attention and focus on essentials
Maintaining cash flow certainly requires full attention and military discipline, meaning that it must be a ruthless (involving an entirely focused management team and key players) process of planning beyond the simple budgetary forecast. Planning must be regular, and on a shorter cycle – 2-4 weeks is ideal. The key is “Consistency”, because things may and will go wrong, and cash planning and management (if performed regularly) may save the day.
Due to inexperience on the owner’s side and oversimplification of business issues, you will run out of cash if your cash outlays exceed cash inflows generated by operations.
While in a start-up phase, the business needs to maintain adequate cash reserve or predictable source of funding before profit sanity and predictability can be achieved.
Most business owners, especially if they are starting a new venture, overcomplicate this process. They go well over what is required and necessary and seldom with enough validated assumptions and information. Forecasts prepared are inaccurate, way too optimistic, and therefore rarely happen. More than anything else, relying on hope is not an excellent business strategy.
I’ve seen numerous businesses, reasonably successful in their chosen domain of expertise, unprofitable due to the lack of strategic focus and robust business strategy. Often, successful projects are masking unsuccessful ventures and numerous hit-and-miss opportunities. Usually, if the cash is flowing “no one is concerned” too much. Still, when the alarm bell goes off, the structured analysis will often point to the primary source of all cash flow issues. That would be (almost certainly) some form of inadequacy or ineffectiveness of the business model and the value proposition.
So the role of planning is to ensure funding is allocated to expected financial objectives and returns. If the set-up is as above, there could only be a minor possibility for a strategy, cash flow, and profit mismatch.
Businesses in a fast-growth mode if in trouble financially become paralysed with robbing from “Peter” to pay “Paul” sending a message to their suppliers, banks, employees and customers that they are out of control financially and strategically. And you know, we live in a small world where news like this spreads like wildfire.
The focus becomes one of making payroll or paying for materials to complete a job phase. There are not enough funds to meet contractual obligations, and future projects and deposits compensate for poor planning and performance. Masked inefficiencies in the short run allow for businesses to commence the same routine again.
The quickest road to bankruptcy
This is a “Death Spiral” of fast growth and sometimes the quickest road to bankruptcy.
I’ve called it the “screw-driver effect”. The management and business owners keep repeating the same process repeatedly, thinking that they’re getting something out of it. Still, in reality, they are screwing themselves deeper into a hole of insolvency. A recent client in this situation, due to the business set up and the very favourable billing cycle (funding with other people’s money) was assuming that the money in the bank was available for all sorts of investing and operational requirements. Unfortunately, underestimated expenses based on inaccurate assumptions provided a false sense of financial security. Poor cash requirement planning and a lack of strategic intent contributed massively to the problem.
A couple of bad months later after completing a few low profitable projects, the business had drained all of its cash reserve to the point where it did not exist. Consequently, it was forced to apply for short-term and very unfavourable borrowing to bridge the gap in its finances. Moreover, deposits received for future projects were utilised to fund past troublesome tasks. Projects were late and their completion, due to the lack of funding and resource allocation, was almost impossible. As you can see, this is a foolproof recipe for financial disaster.
The fastest way to financial sanity
- Perform an independent and objective business improvement review
First of all, review revenue-generating activities and stabilise cash inflows. Perform the profitability assessment for each of your income streams. Then, eliminate non-essentials so that you can focus on the core and most significant revenue contributors. I call it the “STOP LIST” – the list of things you need to stop doing. Essentially, If you can’t stabilise cash inflows and ensure its predictability, you will always struggle with delivering on your financial projections. Third, make the list of 6 -7 issues currently underutilised and not performing at the optimal level.
The initial assessment review is a “birdseye view”, and it should not be detailed, so do not go into the nitty-gritty analysis.
- Determine the 3 most pressing issues based on the objective assessment
From the list above, with your financial advisers or mentors, determine where the “bleeding” is and where your immediate action is necessary. To make it more dramatic, where your actions will save the business or where your inactions could destroy it. It is vital to create urgency, knowing that these issues could mean the end of your entrepreneurial journey if not resolved.
The main thing is to, with the information available, determine the real causes and not the symptoms of poor performances and results.
The main thing is to keep the main thing the main thing.
- Define the strategy and action plan to improve in these critical areas
Once focus is defined, strategies and tactics will reveal themselves. You will have better ideas and a precise action plan to eliminate roadblocks and inefficiencies. Focus only on one strategy, one tactic, one action, and one milestone at one time. Do not overcomplicate things.
- Assign responsibilities and define reporting and accountability structure
Define with precision, who is accountable for results and who is responsible for specific actions.
Once established, create a reporting structure with checklists that will ensure the effective delivery of critical milestones.
- Establish critical metrics and KPIs for each essential function that needs to be improved
When you are improving business processes, you effectively reduce uncertainties and variations. Therefore you need to identify what critical metrics need to be measured and what KPIs will precisely determine your progress. What numbers will tell you that your improvement initiatives are bringing you closer to financial and operational sanity? What milestones do you need to reach so that you can say without uncertainty that things are going in the right direction for you and your business?
- Define critical milestones and review points/timeline
The reporting timeline and format are critical. More than anything else, regularity and comparability will ensure periodical reviews are meaningful and proactive. Periods and KPIs comparison should be based on shared principles and equal units of measurement.
- Review results monthly and get the essential facts right. Then align tactics to support the overall improvement strategy.
Knowing why your overall strategy produces results, your core and most profitable activities, and what should be in your focus regularly are the elements for developing reporting structure and delivery.
What gets measured can and will be improved; therefore your core priority is to continuously develop a non-complicated and straightforward reporting structure that will eliminate uncertainty and strategically pinpoint both early warning signs and your strategic wins. Please, do not take it easy; your financial future depends on it. The process explained nearly always creates the results you want and need.
Vladan Nikolic, the founder of Effecta Group, one of the leading Australian construction consulting companies [https://www.effecta.com.au], combines over 20 years of small to medium-sized business experience in both financial and operational areas, turnaround planning and consulting.