Understanding where cash comes from and when is fundamental“The most important thing about education is appetite.” -- Winston Churchill
Did you think there would come a day when the infamous Four Horsemen of the Apocalypse would be galloping across your playing field?
I did. You see, I've been on a finance jag recently and have been wracking my brain over why business executives aren’t able to keep these riders off the premises. I've recently had more discussions than I care to recall with business owners, and often their finance leaders, who can't find 30 minutes – no cost or obligation involved – to understand the true nature of the finance issues that are choking their companies.
When do executives care about business finance?
You're thinking, that can't be right, can it? Why would a capable business executive – not you, of course – ignore the problems crippling his company? Is he somehow immune to the ravages of the lingering economic malaise?
A few weeks ago, I spoke at the annual Wine Industry Financial Symposium in Napa about strategic finance. There, too, wine industry cognoscenti spoke about the need for stronger financial management. That’s what got me thinking … when do middle market companies pay attention to business finance? I’m afraid, for many, it’s only when the Four Horseman are streaking across their property.
The Black Death arrives with the First Horseman of the Apocalypse
The first horseman sits astride a white horse. That’s good … white is good, right? Alas, not, for the man on the white horse is Pestilence carrying a bow, and the arrow is the plague of poorly managed cash flow. A similar plague bore the Black Death that killed over 25 million people in 14th century Europe, over one third of Europe’s entire population.
The first time business owners suffer from the lack of sound business finance principles is when they run out of cash. They belatedly discover they can’t meet payroll, their suppliers are calling about overdue invoices or they’re put on a C.O.D. basis by an important vendor. Most businesses face off against this horseman at some point in their adolescence, and most don’t want to see him again … but they may not realize there is only one antidote: cash flow forecasting.
If your first reaction to this is that “No one can foretell the future so forecasting is a waste of time,” please stop reading and call the undertaker. I’ll stick with Gen. Eisenhower’s simple premise: “In preparing for battle, I’ve found that plans are useless but planning is indispensable.” Yes, circumstances change and plans fail, but a well-prepared forecast offers one powerful advantage: if you can see the problems coming before they arrive, you have a much better chance of cutting them off at the pass.
Be clear. There’s no substitute for cash flow forecasts. At a minimum, they should be done for 12 months on a strategic or financial statement level. Since the greatest amount of cash flow comes from the balance sheet, don’t use a lame substitute for cash flow like EBITDA, which arises only from P&L activity. If cash is particularly tight, add a 90-day weekly forecast, prepared at a tactical level, where you can control specific payment dates. Track payroll payment dates, vendor disbursements and other specific cash outlays, and stay on top of each check every day.