Liquidity & Effectively Managing Cash Flows...a very simple concept, easy to understand and yet the one responsible for crisis and downfall of one too many mega-corporations!
This is based on my course notes for young Entrepreneurs.
Cash-flow management is akin to managing the hydration process in the human body. There has to be sufficient water inflow in the body (drinking water, juices beverages etc.) vis-a-vis the outflow thru urine and perspiration. In the short run, body will dehydrate if intake < outflow. If not mindful, ultimately the kidneys will pack-up and the body will collapse.
Cash-flows get impacted either by over ambitious projections which do not convert to actual sales and thus not to cash or by not controlling expenses to match income. If this critical flow is mismanaged, a business may have to end-up paying out before it receives cash thus creating a cash crunch. Smart companies thru cash-flow statements and its effective management, strive to create a positive and stable cash flow.
Quicker recovery cycles from customers (Accounts Receivable) & delayed payment cycles for its suppliers & creditors (Accounts Payable) creates a positive and free cash flow thru management of delta. However justified, one cannot be unmindful of the brand reputational impact, if un-negotiated, uncommunicated & unilateral delays in payments is what you indulge in to manage your cash flow delays.
A reverse or negative cash flow over time depletes the stock of cash and if this situation is not effectively managed, it reaches a point such that it's inadequate cash inflows and cash recovered even after sale of its assets is unable to meet its liabilities and outstanding. This is the classical state of Insolvency, which some large business houses currently are facing.
Be Wise. Immediately the negative cash- flow trend:
a. Increase Sales, offer discounts, offer value schemes
b. Finish the 'WIP' Product offering fast and Release invoices for payment faster and push for recoveries fastest!
c. Induce Suppliers to increase credit period & discuss with suppliers to delay payment period
d. Use overdraft and lines of credit to temporarily fill the cash flow delta
e. Continue re-forecasting the cash flow statements for the future to avert crashes going forward.
Ongoing Free Cash flow is a great indicator of the performance and enterprise success.