Although profitability is regarded as a key indicator in assessing the success of a business, the generation of cash is an equally important indicator.
The importance of cash flow is highlighted by the fact that business valuations are often driven by the amount of cash that a business is expected to generate.
In this economic climate, many businesses find that although they are profitable, their cash-flow position is weaker than it should be. Some of the pressures facing businesses include:
l Debtors requiring more time to pay and rising unexpected bad debts.
l The need to service existing loans.
l Input costs increasing faster than output prices.
l The need to invest in new assets.
Improving cash flow starts with instilling a cash-conscious culture across the organisation. This may be done though incentives, and training and coaching of all staff whose role may have an impact on cash flow.
Detailed cash-flow forecasting is important because efficiencies can often be identified upfront. The cash- flow forecast, or budget, should be strictly adhered to and the business case for deviations carefully studied.
A detailed review of the most cash-sensitive areas of a business should then be undertaken, including accounts receivable, accounts payable, inventory, capital expenditure, investments, assets and financing.
The detailed review should identify whether each area is underperforming in terms of cash flow, and if so, the root causes of underperformance.
Addressing the underperforming areas may require streamlining business processes, revising trading terms and restructuring debt.
Some of the common tactics for enhancing cash flow include:
l Reducing overdue debtors and implementing efficient debt follow-up processes.
l Negotiating extended terms with suppliers and avoiding pre-payments.
l Optimising investment policy.
l Selling redundant and/or non-core assets.
l Defining inventory management strategies to reduce stock.
Although many initiatives appear to be simple, actions taken to enhance cash flow should be thoroughly investigated and modelled to understand the impact on the business as a whole, and to calculate the net benefit.
A successful cash-flow enhancement exercise requires analytical thinking, a strong cash focus driven by top management, real understanding of what drives cash flow, and a thorough understanding of the impact any initiatives have on the business.
Conducting a cash-flow enhancement exercise is a detailed process. However, the time and energy put into the exercise is well invested.
l Akoob is a senior manager in the management consulting division of
Most Popular Stories
- Chobani Counters Competition With Expanded Lineup
- What to Expect From an Amazon Smartphone
- Clinton Sought GOP Support for Health Plan
- Saucedo Mercer Running on Empty in Arizona
- Spring Salmon Return to San Joaquin
- Auto Parts Plant Opening in Pa., Jobs on Tap
- IPO Market Shows Signs of Settling Down to Earth
- Pakistan Library Dedicated to 'Osama bin Laden, the Martyr'
- 'Beige Book' Federal Reserve Survey, April 2014: Full Text
- Venture Investments in U.S. Highest Since 2001