Cash is king

One of the key value drivers of a business is its cash flows (not profit, mind you). In fact, cash flow is the most important factor in determining a company’s value. Cash flow determines the ability of a company to survive and is a barometer of its health. Cash is something that cannot be tweaked or manipulated and therefore, the entrepreneur should monitor cash metrics closely and take appropriate action.

Unless a company’s financial operations are designed efficiently, having a good revenue stream, or controlling expenses alone would not matter. If the cash-flows are negative, the company will eventually go bankrupt no matter how promising the business model is. So, the focus has to be on maintaining a positive cash-flow.

Creating a cash flow statement illustrates the amount of cash the business generated during the reporting period. The cash flow statement also details the cash used during the period, helping management see where the money is going. There are two methods of reporting cash flow, the direct method, and the indirect method. Both have the same three cash flow activities.

1.   Cash-flow from operating activities – This section of the statement illustrates the cash received and used during normal operating activities. It details the changes in ledger account balances for the current assets and current liabilities.

2.   Cash-flow from investment activities – Under this section, all of a company’s investments are listed. Any purchase or sale of property, equipment, and plants also qualify under the investment section.

3.   Cash-flow from financing activities – This section lists the information for a company’s financing activities, including the purchase of bonds, stock, and dividend payments.

Any information that relates to interest earned on an interest-bearing account or the amount of income taxes paid in a reporting period is classified under a supplemental section at the end of the cash flow statement. This section is also used to record any significant exchanges that did not involve a cash transaction, such as exchanging stock.

Managing working capital, or operating liquidity (the speed at which assets can convert into cash), has always been crucial to the long-term financial health of top companies. However, it has become even more vital in the current fiscal landscape, as easy access to large amounts of affordable credit will likely become more difficult when rates eventually rise. The working capital requirement has a direct impact on cash available in the company and on its financial capacities for growth. To improve working capital, one must;

  • Collect receivables on time
  • Optimize global supply chain by reducing inventories
  • Increase suppliers’ debt

There are five simple steps to improve working capital management:

1.   Assess your current position – Conduct a baseline assessment of your current state of working capital, cash-flow, and line of credit.

2.   Track your performance – Develop management reports and dashboards to track and monitor compliance across the company, both laterally and horizontally. To ensure that continued efforts remain focused and consistent, consider partnering with an internal audit team that will have ownership of strategic implementation.

3.   Create an Action Plan – Each area of the company should create practical and measurable action plans, complete with accountability and target dates.

4.   Roll it out – Starting with senior managers, cascade the information throughout the ranks, making sure that every team and area leader has a full understanding of the scope and scale of imminent changes, as well as their areas of responsibility.

5.   Continue to improve – It’s important to make sure that your initiative is sustainable. When undertaking a holistic approach across numerous platforms, it is always important to keep things simple.

A continuous analysis is always key to improvement in long-term management and optimization success. And getting this right makes all the difference.

Karthik Ganeshan

Co-Founder and Director, BeyondSquare Solutions.