Wednesday February 4, 2009
“I DON’T NEED A CASH FLOW PLAN”
Once you have the following items: your sales plan, your income statement and your balance sheet it is time to develop your cash flow plan.
We've all heard the phrase “cash is king.” Well, that is no truer than with a small business. Small businesses live and die on their cash. Many business owners think, “I have been very successful up to this point and I have never had a cash budget before.” How much more successful might you be if you had taken advantage of some of those opportunities that you passed up because of time or money? If you are running business the same way day-in day-out, you're right you don’t need a cash flow plan. However, if you are going to grow the business and, more importantly, take advantage of new opportunities, you need a cash flow plan.
Many owners manage their cash from the seat of their pants but they still manage their cash. One owner might say, “I know that every summer business slows down so I use my bank line of credit and then as soon as Christmas hits I pay it off and put money in the bank. So I really don’t need a cash flow statement as I have no problems with cash.” So you don’t need a cash flow budget; then I have a couple of questions. Where is your sales plan by product line? In your sales plan how much money do you have for new products? How many products are you buying? Where is you inventory plan? Which products have the fastest turn around time? How many months of inventory do you have on hand? All of those things take cash and it takes planning to make sure you don’t have too much cash sitting on the shelf in something called inventory.
Let us say you are a service company and don’t have inventory. What if I could show you that hiring a person could save you a lot of time so that you could generate more sales? You need to match revenue growth with additional staffing needs. You may have a great sales plan that actually works, but not enough properly trained employees to respond to customer requests. Have you ever heard of a company being so successful they got crushed because they could not keep up with orders or the service requests? “I am sorry but we are not taking any new bids right now.” What’s that about? It’s about the lack of planning. I have seen companies respond by over-hiring. The dangers of over-hiring including hiring the wrong people and/or hiring really good people but not providing them with the training or tools to succeed. The talented people get discouraged and easily find new jobs, but the less-talented people, well, you get to keep them.
A construction company advised me that they really didn't need a cash flow budget because they just hire employees and buy supplies based on projects bid and their customers fund all their cash needs. So what about new equipment, doesn't that take cash? Your company is making good money and you plan to be in business for a while, then why are you renting your facility?
A real estate company said they really didn't need a cash flow budget because they do very small projects and take the money out of every day operating profits. I have seen real estate companies put too much money in properties that they really didn't need and at the same time miss out on better investments because there was no strategic plan.
This is a paradigm shift in thinking, as there is a reason that most successful companies do things a certain way. Of course it makes no sense to make a cash budget if you don’t understand it and can’t use it. That’s why you get professional help and you hire the people who can facilitate your strategic planning.
Hire me as a part-time CFO and I will help you develop an integrated cash operating plan so that the need for cash does not stand in the way of your business going to the next level.
"Copyright ©, January 30, 2009, by David Wandrey"
Written by: David Wandrey, CPA, and Part-Time CFO for medium and small businesses. David has consulted or been employed with companies that had sales ranging between $2 million dollars and $500 million dollars annually. David has over 20 years of financial management and consulting experience in a variety of industries including, publishing, internet, manufacturing, medical, construction, defense, computers, retail, real estate, financial services, cable television, and newspaper.
