Wednesday, November 17, 2010

Adding Machine (Simple) Cash Flow

In the CFO world, I don't think we've hit the generation who doesn't remember financial life before the desktop or laptop computer. (If we have, keep that to yourselves cause I don't want to know about it yet!)

But there was indeed financial life before computers. Remember the adding machine? My grandfather had an adding machine and every month I could hear his fingers flying up and down those numbers. He would crank the handle & mumble a few words I wasn't supposed to know yet. Every few hours he would holler for his business partner.

"Did you know Ma Bell wants $5.75 for our phone this month?!" What's she going to do? Re-invent the way we use it?" (Little did he know! Again, this was before the AT&T breakup and subsequent, 2 decades later, re-combination.)

"Edddd! Ed! (Names have been changed to protect the innocent.) Where is the invoice for the Johnson account?! We can't make money if we don't invoice these people!"

"Edddd! Ed! We've got to talk about CASH FLOW, Ed!"

And my ears perked up. At only 11, I had an idea about cash flow, but I didn't really KNOW cash flow.

And so it was between Ed & my grandfather that I learned my first financial lessons. (I learned what those mumbled words were too, but I won't share those!)

The basic concept of Cash Flow Management hasn't really changed since I was a kid. After all, it really is simply analyzing and ensuring that your cash inflows surpass your cash outflows at any given time. Doesn't matter if you're using an adding machine or fancy software.

Now, when we get into tracking, analyzing and adjusting cash flow, things get a little trickier, but let me share some insight with you. But remember, cash flow is NOT income. You can have high income but negative cash flow.

First, analyze your cash flows. Then devise & implement cash management strategies.

To illustrate this and make it more simple, let me provide you with an example:

  • Let's assume you enter into a $200,000 contract to provide marketing services over a period of 6 months.
  • Your revenue the previous year was $1,000,000 so that contract provides 20% of the previous year's revenue.
  • According to the contract, you submit invoices once per month, on the 30th. Then the customer has 30 days to pay you.
  • Your firm starts fulfilling the contract on February 1st.

Fortunately, with a non-retail or wholesale service business (except for construction and other materials-heavy business lines) there is typically minimal cost incurred before the contract commences.

(Tune in Friday for the rest on cash management for small businesses.)



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