In a truly great company, profits and cash flow become like blood and water to a healthy body: They are absolutely essential for life, but they are not the very point of life” – James Collins, Good to Great
As Jim Collins so wisely said, cash may not be the ultimate point of a company, but it is like blood to the body – essential for survival.
We asked 10 BAM practitioners to share their insights about cash flow. Read below the 10 tips they shared and also 10 ‘red flags’ – the tricky situations they have encountered where cash flow can easily trip you up.
In Part 2, we share 7 short stories of ‘Cash Flow Mishaps’ – real-life cash flow challenges that BAM practitioners have encountered
As one BAMer summed up, “Cash flow is an important indicator of how a business is doing, don’t take your eye off it!”
Cash flow tips from BAM Practitioners – Do:
1. Always watch your cash flow very carefully and plan ahead at each stage.
2. When business planning, find a cash flow projection template and someone who will force you to fill it in!
3. Use forecasting tools and technologies to help you watch and manage cash flow on an ongoing basis.
4. Be willing to make the hard decisions when you don’t have the cash.
5. Always have written contracts for supply and payment terms.
6. Push for the best payment terms you can get, with accounts receivable paid as early as possible.
7. If a client cannot or does not want to pay then stop delivering the services.
8. Make sure you have an appropriate amount of working capital for times of growth and beware of scaling too quickly when cash is short.
10. Draw on your Advisory Board.
Cash flow red flags – Tricky situations that put pressure on cash flow:
1. Growing too quickly and underestimating cash needed to service that growth: increasing production, hiring additional labour, adding additional services, paying for more supplies etc.
2. Not budgeting for the time needed to grow organisational capacity and deal with quality control issues.
3. Sinking a large amount of cash into product development with a long lead-in time or an unproven market.
4. Long lag times between having to pay suppliers for raw materials and receiving payments from customers.
5. Fluctuating quality or fluctuating prices of raw materials.
6. Contracts with big clients who deliberately pay late or small clients who experience difficulty who won’t or can’t pay.
7. Foreign currency exchange fluctuations that result in a significant reduction in expected income.
8. Clients who expect more work for the same contractual agreement or that cannot deliver their side of the contract, while you have fixed costs.
9. Having one large customer that has cash flow problems of its own.
10. Extortion or delays caused by government bureaucracy.
Compiled by Jo Plummer, with thanks to the BAM practitioners we surveyed.
Jo Plummer is the Co-Chair of the BAM Global Think Tank and co-editor the Lausanne Occasional Paper on Business as Mission. She has been developing resources for BAM since 2001 and currently serves as Editor of the Business as Mission website.
Join us for our Business Planning Part 3 series on The BAM Review Blog, looking at financial planning and people planning. Have your say on social media on this topic by following us on Twitter or Facebook.