It’s OK to Micro-Manage Your Cash Flow
Attaining accurate and timely intelligence about your cash flow is often a mystified experience. And the mystery emanates not from a lack of knowledge of your business but most often from the shear volume of moving parts that aggregate to 'money in the bank'. So, our human nature takes the driving seat and persuades us to ' just average our cash flow activity to predict our future bank balance'.
“But when designing a system that predicts Cash Flow, Averaging is only a mild virtue of such a system.”
The coveted virtue of a system that predicts cash flow is the instant access to the multitude of drivers that make aggregate to 'your predicted money in the bank'.
Below is a list of what we think are the most important questions relating to Cash Flow in your business. And within each big business question, the workflow elements (cash flow drivers) and consequently, predicting your bank balance.
Can you predict your bank balance for the next 90 days?
What do you need to know to make this happen?
Current cash in bank
Cash Inflows
Accounts Receivable - Including payments terms and discounts for each customer/invoice
Sales Forecasts - what's in the pipeline and expected conversion amounts and timelines
Sales Orders - Including projected delivery amounts and timelines
Cash Outflows
Capex - planned investment
Equipment/machinery
Facility upgrades
Opex - planned ongoing expenses
Payroll
Rent
Inventory
Utilities
Marketing
R&D
Admin costs
Repairs
Tax
The Cash Runway Wizard below is an exhibition of predicting your Cash Flow through the mechanics of your business workflows. It is helpful to remember that the investment that you made into your ERP and supporting systems were large investments and they promised to optimize and control the processes in your business.
A Dashboard like the example below is the consequence of layering Business Intelligence atop of your ERP and supporting systems to explode the value of the investment that you have already made or continue to make into bullet-proof business systems.
Can you identify the lag between earning a sale and banking the cash?
What do you need to know to make this happen?
Dates of sale
Dates of invoice sent
Payment terms (net 30/60/90)
Date of Receipt
There is information gold in measuring your collection cycle under various conditions. Understanding the conditions that produce shorter collection cycles allow your team to make optimal credit decisions and contract terms.
One of the easiest ways to rate the conditions of credit is to profile your customers based on the collection cycle for each customer over time. Another condition which is easy to measure is the relationship between payment terms and discounts offered and to analyze the profitability of the decisions made around discounts offered and payment terms extended. For example, is a 1% discount on $1m a better financial decision than say, extending payment terms by 1 month ? Culling your Accounts Receivable data in the right way will furnish you with the intelligence required to be pin-point accurate with your Cash Flow related decisions.
How often do you analyze the cash flow implications of your investment in your core offering (Inventory, People, Information, R&D, Floor Space)?
What do you need to know to make this happen?
Inventory turnover rates
carrying costs
Lead times
reorder points
optimizing the timing of inputs and outputs
making data-driven hiring decisions
accurate sales forecasts
Your core offering may be inventory (bought or manufactured) or Services or Information or another. But in all cases, the efficiency of how your core offering is delivered will have a direct impact on your money in the bank.
In the case of inventory, optimal holdings, favourable payment terms and smart buying decisions are key.
For manufacturing, it is crucial to tighten the reign on input costs, optimize the timing of manufacturing and plan capacity in a scientific manner.
For services that rely on people, knowing what the objective trigger for hiring talent, will anchor your cash flow in predictability.
Are you able to correlate marketing spend with cash flow changes?
What do you need to know to make this happen?
Marketing spend
Sales Growth
Customer Acquisition Cost (CAC)
Conversion Rates
Your marketing spend is likely an ongoing outflow of cash. It takes trial and error but incrementally finding the algorithm for marketing that consistently has a positive impact on cashflow is the predecessor to success. Meaningful analytics will shed a light on this correlation and offer the insights to continue to refine your marketing spend and its summon on your cash to the bank.
How does understanding your customer's gross lifetime value (LTV) affect decisions on customer acquisition and retention?
In other words: "Do you know how much you can reasonably spend to get and keep customers?
What do you need to know to make this happen?
Customer Acquisition Costs
Average Purchase Value
Purchase Frequency
Customer Lifespan
Retention costs
We left this one for last as it is often the harder one to quantify. There are so many activities across your business that go into acquiring and retaining your customers that quantifying and allocating these costs is hard. The good news is that once you have Business Intelligence setup across your organization, the cost of doing what-if analysis on your LTV becomes a lot easier and a lot more affordable.
Not all customers are the same and having your data speak to you about where and how your cash is moving in relation to new and existing customers will empower you to make customer acquisition and retention investment decisions that give you a competitive advantage over your competitors.
Conclusion
Above all, it is important to ask the right question about cash flow as it relates to your specific business and the business language that you use in your business.
If this is difficult at first, then ask this question first: 'Can I predict my bank balance for the next x number of days?'. The quest to answering 'yes' to this question will generate many opportunities to obtain the data points above and improve your workflows and consequently offer meaningful data for real-time, organization-wide analytics.
Craig Juta
CEO
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