Like blood that flows through our human bodies to keep us alive, cash flows through a business to keep it alive. Cash Flow and having cash to run continued operations is one of the most
important parts of the business. Managing cash flow is one of the most critical skills within the business acumen portfolio.
As I continue my life’s journey of helping our client organizations build their business acumen skills, it has become more apparent than ever that we have a lot of work to do in this area.
Most of our learners “get” the Income Statement and Balance Sheet pretty easily. The Cash Flow Statement is a different story. The Cash Flow Statement, which helps us understand the sources and usages of cash from an operations perspective, investing perspective and financing perspective can be challenging because of its complexities and nuances. However, without a foundational understanding of how it works, senior leaders down to first-time supervisors can make huge, game-changing mistakes.
To help provide some insight and clarity, I am borrowing some of our very own business acumen content to share some ideas and information about the criticality of cash flow.
The 4 biggest mistakes companies make in terms of Managing Cash Flow
Coming off three straight virtual business acumen sessions in the last 24 hours, this is a hot topic on my mind. During these sessions, I watched team after team of learners running a digital business simulation as the core part of the workshop make very poor decisions which gave me the idea for this blog. Here are the 4 biggest mistakes:
1) Poor Forecasting and Budgeting
This is by far the number one biggest mistake.
- Definition: Forecasting is the art of predicting how much you are going to sell in terms of products and services. Companies often fail to create accurate cash flow forecasts and budgets. Without a clear understanding of incoming and outgoing cash, it’s challenging to plan for future expenses and revenues.
- Negative Impact: This can lead to unexpected shortfalls, an inability to meet financial obligations, and missed opportunities for investment or growth.
- Definition: Accounts Receivables are the amount of cash the business is expecting to collect from a customer based on the promise that the customer will pay the vendor within 30, 45, 60, or 120 days. Let it sink in. You provide your customer with a product or service and they don’t have to pay you for 160 days or about 4 months. In other words, you are giving the customer organization a free, no-interest loan for a few days on an entire month. The bigger the number of days to pay makes the situation go from bad to worse. Unfortunately, this is not always on the customer! Too many companies do not manage their accounts receivable efficiently, resulting in delayed or missed payments from customers.
- Negative Impact: Slow collection of receivables can create significant cash flow issues, forcing companies to rely on credit or reduce their operational capacity.
- Definition: Companies sometimes tie up too much capital and cash in inventory, leading to high storage costs and potential obsolescence.
- Negative Impact: Excessive inventory levels mean you have spent the money to make a product but you haven’t sold it yet and don’t have a line of sight on cash collections. This can strain cash flow, reducing the available funds for other critical business activities and investments. In other words, you can go bankrupt because you can’t pay your bills!
- Definition: All too often, businesses don’t have the right perspective on the resources needed to do something. And it’s understandable as everyone intends to do the best job and create value for the customer. However, there must be perspective from a cash flow perspective.
- Negative Impact: A company can’t have “X” of revenues but then spend 3X of costs to fulfill the value proposition by throwing more and more resources into a project all in the name of customer focus. There is a real and tangible cash cost to that that too many organizations don’t have the skills to recognize.
In summary, addressing these issues involves diligent planning, monitoring, strong collection processes, and management to ensure that a company maintains a healthy cash flow, enabling it to operate smoothly and capitalize on opportunities for growth.
