Cash flow management will make or break your company especially in a tough economy. In fact, of the 150+ major businesses that failed in 2008 and 2009 most were due to bankruptcy. (Wikipedia) Also the biggest reason small businesse
s fail is usually lack of capital and poor cash flow management.
Poor cash flow management is like going on vacation without cash or credit cards. Neither turns out to be a pleasant experience. This may sound like common sense but common sense isn’t always common practice. There are many reasons why companies fail to manage their cash flow effectively including having insufficient accounting systems in place, lack of focus and lack of discipline.
Some companies struggle because their eyes are bigger than their wallets. For example, a $5 million tech firm had enjoyed steady double-digit sales and profit growth selling non-core technology to small businesses. In late 2011 the company jumped at the chance to bid on a large project for a mid-sized business for their core technology. They were ecstatic when they were awarded the business and high fives were given all around. However the euphoria quickly turned to angst when the CEO realized the project would consume most of their resources and cash flow for the next 6-9 months. Although the project would eventually be profitable the company had to take extreme measures to survive the implementation, including laying off personnel and putting a halt on new business development. Because they failed to anticipate the impact the project would have on their cash flow management the long-term viability of the company is still in doubt.
Spending and committing resources as if the road always be straight and narrow is inviting disaster. Cash must be managed as the precious resource that it is instead of the endless supply people thought existed before the start of the Great Recession. At that time, much growth was fueled by the desire to grow and the availability of money. In the New Economy credit and cash have tightened up and demand has fallen off in many markets. This means unless you have money to burn don’t pursue a market that doesn’t have demand or you can’t uniquely and effectively service. At least not right now.
One example of a large company who positioned themselves for growth with cash flow management was ITW. They put several initiatives in place that helped them recover rapidly from the downturn they experienced in 2009. Among the actions taken, ITW:
- Restructured several businesses to get their cost structures in line with the marketplace.
- Assessed their various global markets and put resources where they saw growth and put growth plans on hold where markets were stagnant.
- Improved working capital by managing receivables and inventory.
- Implemented programs to increase cash flow.
Managing your cash flow doesn’t mean don’t spend and don’t grow. It means having the financial resources available when growth opportunities are available.
Do you have the financial resources to support your growth initiatives without putting the company at risk? If not get your financial house in order immediately. If you wait until the “time is right” it may be too late.