Situation: A CEO has her company on a positive growth track. The company has a solid customer base. Their products and accompanying services are increasingly well-accepted. She is ready to take the company to the next level of growth and profitability. How do you unlock your true profitability with sound cash-flow tradeoffs?
Advice from the CEOs:
- Profit is different from cash flow. Make this distinction clear and act to boost cash flow.
- Tracking Cash & Forecasting:
- Watch the company’s bank balance. Frequently track cash inflows and outflows by period.
- Carefully assess and project the pattern of customer buying habits and payment performance to develop sound revenue assumptions.
- Compare the company’s margin dollars and billings with norms for peer group businesses.
- Issues to consider in forecasting:
- Hiring means commitment of future cash outlays. Consider contingent work force options.
- Project and plan for future large payments (equipment, technology, marketing, loans, etc.)
- Differentiate between investing in ongoing business capacity as opposed to incremental add-ons.
- Look at cyclical trends and issues. Understand your customers’ purchase habits and patterns.
- Develop likely “what if” scenarios (good and bad) and develop plans to reduce the impact of surprises.
- Analyze the company’s business model and determine exactly how cash flows through the company’s operations.
- Analyze important upcoming decisions: hiring equals investment; outsourcing equals expense. Evaluate needed support for each.
- Differentiate investment versus outsourcing decisions. Smooth cash flow through selective outsourcing – especially when dealing with sudden or cyclical peaks. Avoid the risk of committing long-term resources by staffing up to address short-term peaks.
- Focus on the opportunity cost of money. Add this focus to both planning and assessment.
- Operate with a mix of other peoples’ money and ownership funds. The latter are more expensive than bank interest because the trade-off is what you could earn through alternate investments.
- Fine-tune the company’s planning tools. Analyze budget and cash implications of alternate plans through detailed budget projections and follow-up by tracking cash expenditures.
- Use Cash Flow Statements to analyze and project trends in investments, operations and financing and how each of these affects cash balances.
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