Although a company's profitability is a vital indicator of its overall performance, it does not always guarantee ongoing development or even survival.

The cash position of a business is one of the key concerns of its owner. Somehow, there never seems to be enough money to meet payroll, pay vendors and other company obligations on a timely basis and still have money left over in the bank. Yet, a quick look at the company books is likely to reveal the company is making a profit. So, what's really going on?

Although a company's profitability is a vital indicator of its overall performance, it does not always guarantee ongoing development or even survival. In fact, in spite of profit on paper, more businesses fail because of a lack of cash flow. For that reason, when planning the short- and long-term funding requirements of the business, it's crucial to forecast not just the project profitability but, more importantly, the cash requirements to sustain the business, regardless of the economic climate.

Where'd the Cash Go?
Cash is a company's lifeblood. Managed well, the company remains healthy and strong. Managed poorly, the company goes into cardiac arrest. A company can have the most in-demand service or product in the marketplace, but it won't matter if the firm runs out of cash.

Why do companies become cash poor? The two main reasons are:
1. Companies aren't realistic when it comes to predicting income and expenses. Instead, they overestimate income and underestimate expenses.
2. Owners ignore the warning signs of cash shortages and run out of money when they fail to effectively allocate available funds for these lean times.

When a sufficient amount of money is coming into a construction business, many owners don't give cash management a second - or even a first - thought. Yet, this is when they are most vulnerable to cash-flow dangers.

The Cash Cycle
Cash resource management involves controlling the time between paying suppliers or employees and collecting payment from customers. In other words, it means delaying outlays of cash for as long as possible while encouraging those who owe money to pay as rapidly as possible.

Sales, costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. Although a sale may have been secured and goods delivered, the related payment may be deferred as a result of credit extended to the customer. At the same time, payments must be made to suppliers and staff. Cash must be invested in rebuilding depleted stocks.

New equipment may have to be purchased, and the demands go on and on. This lag time is often referred to as the cash cycle.

The net result is cash receipts often delay cash payments, and though profits may be reported, the business may experience a short-term cash shortfall. This deficit forces the owner to fixate on quick cash acquisition rather than effective business management and growth. For this reason, it is essential to forecast cash flows and shortages as well as to project likely profits.

Cash Management Tools
To manage cash effectively and efficiently, a business owner not only needs to understand the cash cycle but also requires a good cash management tool. There are many tools available, including computer and accounting programs that have cash management forecast tools built in. However, these systems tend to work in a vacuum and function as if the world is always perfect.

For example, if a client owes the company $10,000, due on the 10th of the month, the program will assume this payment will be received exactly on the 10th. The likelihood of this payment, as well as others, being received on time is negligible.

Other tools are based on a generic Excel spreadsheet model that incorporates accounts receivables, bank balances, lines of credit, accounts payables, debt and other information. This model can be manipulated to see exactly where the cash is appearing and disappearing.

The primary purpose of a cash management forecast tool is to predict the company's ability to take in more cash than it pays out. This gives owners and key executives some indication of the company's capacity to create the resources necessary for sustainability and future growth.

32 Ways to Improve Cash Flow
Once cash flow projections have been prepared, they should be critically examined and used as a management tool to control and improve the company's expected cash position. Use these suggestions for improving cash flow:
1. Increase sales (particularly those involving cash or short payment cycles).
2. Reduce direct and indirect costs and overhead expenses.
3. Defer discretionary projects, which cannot achieve acceptable near-term cash paybacks.
4. Increase prices and charge interest, especially to slow payers.
5. Review the payment performances of customers - and involve the sales force.
6. Become more selective about granting credit.
7. Seek deposits or multiple-stage payments.
8. Reduce the amount of credit given to customers and shorten the time when payment will be due.
9. Bill as soon as the work has been done or order fulfilled.
10. Improve systems for billing and collection.
11. Use the 80/20 rule to control inventories, receivables and payables.
12. Generate regular reports on receivable ratios and manage them.
13. Establish and adhere to sound credit practices - and train the staff.
14. Use more proactive collection techniques.
15. Add late payment charges or fees where possible.
16. Increase credit from suppliers.
17. Negotiate extended credit from suppliers.
18. Make prompt payments only when worthwhile discounts apply.
19. Reduce inventory levels and improve control over work-in-progress.
20. Sell off or return obsolete/excess inventory.
21. Consider factoring or discount facilities to accelerate receipts from sales.
22. Defer non-crucial capital expenditures.
23. Use alternative financing methods, such as leasing, to gain access to the use (but not ownership) of productive assets.
24. Renegotiate bank facilities to reduce charges.
25. Seek to extend debt repayment periods.
26. Consolidate bank balances.
27. Sell off surplus assets or make them productive.
28. Enter into sale and lease-back arrangements for productive assets.
29. Defer dividend payments.
30. Raise additional equity.
31. Convert debt into equity.
32. Use medium-cash flow forecasts and update them regularly.
When the cash flow is improved and consistent, the business process will work properly.

Cash Today and Tomorrow
If most business owners start their companies to succeed, why do so many fail? The answer is simple: They neglect the cash management of their business. Ignore the cash management aspect and the business dies a slow, painful death.

It is up to the business owners to give attention to both the technical and financial portions of the business. By taking simple steps such as improving accounting practices and becoming more selective about granting credit, company owners can fuel their businesses with the energy needed to thrive: a continual cash inflow.   VTR_US

Richard Fineman is a consulting services director with Consulting Services for International Profit Associates and Integrated Business Analysis (IPA-IBA). For more information, call 847-495-6786 or visit www.ipa-iba.com.