Monday, May 10, 2010
Cash Management and Cash Management Techniques
As I've stated before, cash is NOT income or profit. You can show a highly respectable net profit (margins of 10-15% or higher) and still be cash flow negative. Stated another way, your income statement can look like you're doing very well, while your bank statement tells a completely different story.
Unless you manage your cash appropriately, you will likely struggle financially trying to come up with cash to pay your employees and your suppliers. This unplanned cash flow shortage is a big reason many companies go out of business during a recession. Yes, many go bankrupt because they lose key customers. But many who seem to be doing phenomenally well during the boom times also go out of business. Why? Because they owe their success to continually adding new customers. When the new customers disappear or the rate of adding new customers drastically decreases, other operational issues like poor receivables management, poor supplier relationships, and other issues taht directly impact cash management come to light.
How does this happen? Well, new customers create overlap so payment come in that can cover the cash outflow spent servicing existing customers or paying out on poorly structured commission plans. You must make cash management an integral part of budget planning and analysis in order to plan your cash needs and manage your cash appropriately.
To be continued on Wednesday, May 12.
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