The Importance of Cash Flows to Your Enterprise
It should be obvious, but unfortunately, it is not for many organizations- “Cash is King”. Especially in a downward business cycle or extended cycles called “recessions”. Cash levels will determine if your organization will operate offensively or defensively. Just because you have profits does not mean you have the cash needed for your operating capital needs. Profits look good on the Profit & Loss Statement, but are no true indication of the financial strength of the company. An organization can be “profit rich” and “cash poor”. Having cash provides many opportunities to make short term changes and purchases that will produce significant long term benefits. The influx of cash from debt or equity clearly come with strings attached, and in downward cycles, these actions may have severe consequences when there is a shortage of cash to repay loans or meet the terms of financing, which puts the organization on the defensive or unfortunately even “out of operation”. Leaders should always insure that cash collection is a priority to the organization no matter what business cycle you are experiencing. Resist the temptation to spend cash on activities that do not produce a positive ROI (Return on Investment) for either the short and long term, or both. Four “quick” strategies for increasing cash; reduce spending, accelerate the collection of account receivables, renegotiate or slow the outflow of accounts payable payments, and lastly, increase revenues. No magic there. What is usually forgotten is that the organization does not have a plan or processes to work these four strategies. Make sure everyone in your company understands the importance of cash flow to the ongoing operation of the enterprise, and spend quality time creating a cash flow plan during both growth and declining times; Having a plan, awareness and a commitment of the entire organization, and you have improved your chances for sustainability.