Managing cash flow is a challenge every manager faces, every day, every year. Managers who closely monitor day-to-day activities and emerging industry trends can help reduce a company’s exposure to the coldness of the cash crisis.
How do you anticipate, avoid and / or reduce the impact of a monetary emergency?
First, be aware of a shortage of cash. If there is a lack of criticism, pay attention and be prepared to act. Questions that must be answered include:
1. What caused the problem? Prepaying to take advantage of special discounts can reduce cash. A transport strike, for example, can cause delivery and payment delays. Industrial (or economic) slowdowns often cause customers to extend their payments.
2. How do you handle? If cash is not strong then leave a special discount. Passing on a discount is usually more cost-effective than borrowing to make up for shortages. Stay up to date with the latest news. If you hear of a strike and / or looming disruption in your supply chain, make sure you have a backup position. Although costly in the meantime, it can save your business by showing reliability and versatility to your clients in tough times. If your client is in an industry facing tough economic times, be careful to monitor your credit policies and be active in groups. If necessary, strengthen credit terms, but use discretion. Being assertive and supportive of your customers will go a long way in retaining them while still providing you with better cash flow. Hold off on purchases and / or negotiate extended payments if cash is strapped.
Most importantly, document both your problem signal and your solution. That way, if they happen again, you can return to the previous successful actions as the first possible solution.
Imagine potential cash flow challenges, but these are usually unpredictable. Some problems cannot be anticipated, so “what if” scenarios can be created. You don’t need to elaborate, but you can ask what would happen if there was a flood, or, as we recently saw, a devastating tornado. What’s next? Other problems, such as “product sabotage”, can only be dealt with when they occur. Constructing possible scenarios to reduce the risks associated with “unexpected” problems is an important management tool. Learn from each experience and document it, or you may have to repeat it.
Second, watch the sales. Any prolonged (and “prolonged”) drop in sales without correspondence – and at the same time, emerge – cost reduction is a recipe for trouble. Of course, there is usually a time lag between changing sales and offsetting depreciation costs, but early diagnosis can significantly reduce the negative impact. Once you identify a changing trend, act immediately or the effects of the lag will be more severe.
Third: review the budget. If short-term loans are required on a regular basis to cover normal operating costs, the unavailability of such loans or sudden changes in operating costs can be devastating.
If the current operation cannot be supported by sales, it will require more sales, less costs or a combination of both. Although this sounds very simple, many companies are hesitant to “hope”. If treatment is not provided on time, severe financial crises can ensue.
Fourth, keep an eye on new product developments. In many companies, research and development expenditures on new products are often allowed to vary significantly more than the expected budget compared to normal expenses. After all, when you’re creating something new, it’s very difficult to accurately predict cost – or response time – in the first place.
Failure to keep these costs, and time commitments, within limits or to monitor ongoing impacts and costs / benefits could result in project funding continuing beyond the time it would have been cut. Total cash flow can easily be drained down a seemingly endless hole, and often entire companies are at risk with one project not working.
Fifth, beware of pet projects. The pet project is any organizational activity carried out for the sake of ego values rather than consistent with the organization’s mission and profit goals. Pet projects, be they new ventures or cost / profit centers, often create cash flow problems. All organizations have pet projects from time to time. Failure to recognize and tackle pet projects when a cash crisis looms is the death knell for many companies.
Many cash flow challenges have simple origins. Often times it’s just a matter of days or weeks and it can creep up on you. Daily stress can cloud your vision, encourage false hopes or distract you long enough for problems to persist. You can learn from past and / or current shortages of money. You can be aware that sales, budget, and research and development costs remain consistent. You can cover pet projects. In an increasingly competitive world, you have to be on your guard.