Managing Business Cash Flow for Sustainability
On Monday, May 18, I was a guest speaker on Bellafricana’s “Learn from the Expert” session which held on Zoom. I shared my knowledge on how businesses can manage business cash flow for sustainability. Below is an excerpt from my presentation.
BACKGROUND
The Flow of Cash
Cash Flow is the flow of cash in and out of your business. Cash flow management is about managing the RATE or the SPEED at which cash flows in and flows out of your business. Cash Flow is NOT profit. Cash in the bank is what cash flow is actually about. It is possible to make a profit and run out of cash. With NO cash there is NO business!
Cash Flow versus Profit
Profit:
- Revenue less expenses equal profit
- You can make a profit and yet not have cash, e.g., if your customers are yet to pay.
- Not making a profit, i.e. making a loss is not necessarily the end of your business. A business can continue for some time without profit just like a car can continue working even though it cannot move fast.
Cash Flow
- Cash received less cash paid out equals net cash flow. When your customer doesn’t pay on time, you run the risk of running out of cash.
- Running out of cash may mean the end of a business if not promptly addressed.
- A business cannot continue if it runs completely out of cash unless new cash is quickly injected, just like a car will not move if it runs out of fuel.
“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact, we were running out of gas.” — Michael Dell
BUSINESS SUSTAINABILITY
Sustainability is the capacity to maintain a business at a certain level for as long as you want. Sustainability is the ability to exist constantly. A sustainable business is an organization that prioritizes environmental principles and socially responsible behaviour in its business model. In terms of cash flow, and in the context of this discussion, sustainable business is a business that manages its cash flow well enough to sustain it into the future.
WHAT JUST HAPPENED TO CASH?
Covid-19 and the Lockdown
1.6 billion Workers in the informal economy — that is nearly half of the global workforce — stand in immediate danger of having their livelihoods destroyed, warns the International Labour Organization. More than 80 per cent of Nigerians work in the informal sector. In Lagos State 65 per cent of the estimated 25 million people work in the informal sector. They are unlikely to benefit from any tax rebate, this implies that the lay-offs may be inevitable. There’s an agreement between the banks and the Central Bank of Nigeria (CBN) to suspend staff layoffs until further notice to help “minimize and mitigate the negative impact of the COVID-19 pandemic on families and livelihoods,” according to the CBN.
Nigeria announces $136M to help businesses. Central bank head says the move will help small, medium-sized businesses, airline service providers, hotels, health care workers. The House of Representatives on March 24 passed the Emergency Economic Stimulus bill, 2020 to provide a 50 per cent tax rebate for employers and business owners who agree to not make staff cuts in 2020. The fall in household consumption in Nigeria will stem from partial (or full) restrictions on movement, thus causing (1) consumers to spend primarily on essential goods and services; (2) low expectations of future income, and (3) the erosion of wealth and expected wealth
The Cash Flow Diagnosis
Factors affecting cash flow: Fall in household consumption. Poor credit controls. Failure to fulfil your order. Ineffective marketing. Inefficient ordering service. Poor management accounting. Inadequate supplier management. Poor control of overhead costs.
Factors Affecting Consumer Spending
- Real disposable income: i.e. income adjusted for inflation and after direct taxes and benefits.
- Employment and job security: when employment is rising, confidence and incomes may improve.
- Household wealth: house prices, share prices — a rise in wealth can boost consumer demand.
- Expectations and sentiment: the state of confidence or pessimism is known as animal spirits.
- Market interest rates: interest rates affect the incentive to save and cost borrowing.
Cash Flow Drivers
Needs don’t evaporate, they evolve. Customers, lenders and investors still exist. Products and services are still required, but digital is mandatory, not optional. You need to not just pay bills but create value and create wealth. Essential services take a prominent place — health, food, home. Time boundaries to work and business removed. Location boundaries removed, ‘Wherever’ is the place to deliver and receive products and services.
Cash Inflow:
- Products
- Services
- Receivables
- Investor’s funds
Cash Outflow:
- Rent
- Salaries
- Owner’s drawings
- Travel
- Loan repayment
Maintaining Cash Flow Balance
Cash Inflow
- Balance your client base: 2 x 2 = 4; products versus services
- Check your pricing
- Tighten your inventory: obsolescence, expiry, pilferage
Cash Outflow
- Stretch out your payables
- Strategic sourcing — get closer to the source
- Form a buying cooperative
- Consider leasing instead of buying
NEXT STEPS
Manage, Evolve, And Thrive.
Manage:
- Manage existing cash but remember that cost-cutting does not create wealth.
- Manage existing customer/employer — ensure revenue optimization.
Evolve
- Digitalise; your payer still exists but the need has evolved
- Enhance your value creation skills — essential vs non-essential
- Make your value available ‘timelessly’.
- Make your value available ‘wherever’.
Thrive
- Create wealth — pay your future self.
