Cash is king. This cliché sounds trite, but after living through the “Dot-Bomb”, 9/11, and the Great Recession, it’s the single most important rule of the game for small, growing companies. I used to dread getting bad news from my sales team that a client was canceling or a high-profile deal fell through. I would scramble to figure out how to make the next payroll, which involved, on more than one occasion, borrowing against the equity in my home.
At one of the companies I co-founded, Xtiva Financial Systems, we weathered many booms and busts over the years, and in the process, I learned how to manage the fuel that drives the engine: cash. As a supplier to the financial services industry, we had to make sure we were always on top of our game, especially when it came to money. Like most things in business, this is easier said than done. Here are five lessons I learned that I share with my clients regarding cash flow management.
Monitor Cash Flow Levels
First, put in place a system to monitor your current and forecasted cash levels. This means that you have to have a firm handle on all incoming monies (e.g. receivable payments or external financing) as well as outgoing (e.g. operating expenses, payroll, rent, etc.). A spreadsheet is the easiest tool to use. The model I developed starts with a weekly forecast of collections by client, based on their historical payment patterns. I then forecast upcoming vendor payments, giving us the best possible picture for the swings in cash levels. If I see any large swings to the negative, I can proactively manage those swings rather than wait to the last minute and have to scramble.
Stay Cash Flow Positive
Do whatever is necessary to get cash flow positive each and every month. Change your revenue model, increase fees, cut staff, cut salaries, cut discretionary and even non-discretionary expenses – whatever it takes. This is the most important lesson I learned.
Establish Clear-Cut Processes
Develop a formal process for managing your receivables. We were able to reduce the average time that receivables were outstanding from 80 to under 30 days, a level that is quite amazing given the nature of the business (B2B software) and the size of some of the clients (multi-billion dollar in revenues).
How did we do this? We started with a communication loop that began before a client sale was even closed. The Finance team was involved in every step of the process and worked directly with the sales, implementation and client-service teams. Clients were notified in advance of any changes in their billings and we ensured that the client contracts were quite clear on our billing policies.
Any late-paying clients received a call from someone in Finance (I called the larger firms myself sometimes). And, our relationship management team called as well to determine if there were any service-related issues occurring that prevented the client from paying in a timely manner.
Develop a Back-up Plan
If we had forecast a cash “crunch”, we rallied the team to determine a back-up plan. For example, a plan could include pushing payables out further than our standard 45 days, offering the clients the opportunity to pre-pay for a discount on their fees (e.g. “2 net 10”), cutting non-discretionary expenses, etc.
Also, I worked hard to develop a strong relationship with our commercial lender so that we always had a credit facility in place that enabled us to draw down funds on an as-needed basis, backed by our receivables (an “asset-backed line”).
Rely On Your Advisors
Make sure you have external advisors that you can turn to for assistance or advice. Having a group of trusted advisors that have experienced similar pain and suffering is absolutely critical. While they cannot help you avoid every pothole, they can help you minimize the damage.
For many people, an informal board of advisors is enough. Larger firms will want to implement a formal Board of Directors. You can also use networks like the Entrepreneurs Organization (EO) and Young Presidents Organization (YPO) as well as Vistage for networking among professionals in similar situations.
I learned a lot of valuable lessons regarding cash flow management, but the above five helped me stay on top of our financial future. Once these processes and policies were in place, I was able to remain focused on profitability and cash flow. And, by doing so, I was able to double our cash “cushion” (available cash plus credit) in a period of 6 months. Even better, I no longer had to worry about making payroll. I was able to focus on growing the business instead of simply trying to keep it afloat, which is the ideal position for any CFO or CEO.