The power of managing by cash flow
Part 1 of the knowledge program 'continuity improvement'.
I am going to make the importance of cash flow planning clear by an analogy on agriculture.
Thanks to the customer (Director SME) who said to me: "You learned us that in financial processes it is similar as in irrigating land. Water may be scarce but if you manage it well it will give a lot more value." This inspired me to write this article.
This customer achieved in 6 months an increased operating result of 10% from the total sales. This generated sufficient cash flow to ensure business continuity.
You have a beatutiful piece of land which is very fertile but for one reason or another, the harvest is not what you want. Hmm you see big dark clouds nlow over and ditches willed with water but it does not reach te arable land let alone the seeds and young crobs. The insufficient supply of water causes the seeds to germinate poorly and not reaching it full growth.
You decide to take action: the right amount of water will come on the plants at the right time!
Now you have two choices. Option 1 is a temporary solution: fire rockets with chemicals into the clouds so it starts raining; and you have option 2 the permanent solution: lead with irrigation the water flow to your seeds and plants.
Under option 1 you are always dependent on the amount of clouds in the sky and it is known that chemicals from the rocket are poisonous. Because we want to be successful in a respectful way we do not choose this option. If you implement option 2 today you have irrigation tomorrow and in coming years, a long term mean for good harvests. Then you need to control (manage) the irrigation so the water arrives with the correct amount and at the right time; which results to a great harvest.
Back to managing by cash flow: you have a great product or service, but for some reason the financial result is not as you like. Hmm you see plenty of potential customers and in the industry there are fellow entrepreneurs who are doing better. How do you manage that with the right actions your product or service is purchased well in price and quantities? And with this it brings the company a good result with positive cash flow and improved continuity.
Why is managing by cash flow so powerfull?
- cash flow is also understoof by non-financials, while talking about EBITDA some important people within your company drop out.
- If you make the cash flow planning then you are already looking and planning ahead and working on internal alignment.
- during monitoring the realization of goals directly making visible the positive and negative affects on the cash position of the coming periods.
- the idea of having more grip on the cash in your wallet (or bankaccount) is a concrete motivator.
- mnaging by cash flow can prevent a (reasonably) well running company going bankrupt. Or get in economically heavy weather and needing additional funding whish lead to increased cash outflow via paying interest.
The next article in this knowledge program on 'continuity improvement' is "Get the benefits from managing the cash flow".
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