Tool Box
Issue No. 33 - February/March 2007
Going broke...profitably
by Mr Tony Martin
The difference between cash flow and a so-called accounting profit is on a par with the difference between chalk and cheese. Maintain mastery of cash flow management and you’ll never go broke. On the other hand, assume your business will be able to turn into cash what the books say is your due, and you’re making an assumption so rash it could well send you broke.
For a start, you can’t assume debtors will pay you on time, indeed that they’ll ever pay you. Their problems can be the genesis of your downfall.
As a priority therefore, your cash flow strategy should be designed from the start to rely as little as possible on the reliability of others.
Conventional wisdom has it that the basis of good cash flow management is all about establishing systems that will maximise chances of being paid by the greatest possible number of debtors on, or as close as possible to, the due date.
Tradition also has it that concurrently you should keep a tight control of inventory, and delay paying creditors as long as you can without either devaluing your credit rating or your relationship with important suppliers.
However, some advisers are now saying that cash management that doesn’t take account of a business’s organisational process as a whole can’t be effective management.
For example, by reducing production line ineptitude, not only could more units be produced in less time using less material, but also of a quality certain to lessen returns and the number of disputed, unpaid invoices. In just this one area of the business, aids to cash flow could have been achieved, multiplied one upon another.
However, any unilateral decision to reduce inventory, while it might seem to increase cash flow, might well be counter productive for the organisation as a whole, because a more efficient production line could result in bigger orders which couldn’t be filled from a depleted inventory.
It’s been...
