3 Cash Flow Tips

In his book Danger Zone, Lost in the Grow Transition, B2B CFO founder Jerry Mills defines the “Danger Zone” as a condition when the cash needs of the business far exceed the cash availability.  Well, how far is far?  When do you stay the course and when do you throw in the towel?  How bad do things have to get before they are too bad and how do you know?  The questions are easy.  The answers, not so much.  This article attempts to provide some encouragement for those finding themselves in the Danger Zone.

Would it surprise you to know that you can have positive net income reported on the income statement and yet have a cash flow that can drive you into bankruptcy?  It’s true.  Lets look at some conditions that are suggestive of entry into the Danger Zone and then address some actions that can be taken to enhance the chances of a turnaround.  Despite that this discussion is in somewhat conceptual terms, it contains principles that can be applied to businesses courting the Danger Zone.

The Symptoms:

Cash flow is reflective of cash coming in and cash going out of a business.  Positive cash flow means that there is more cash coming in than going out and negative cash flow is the reverse.  Cash flow is a function of three things: price, volume and timing.  Cash flow problems begin to exhibit when the amount and frequency of the ins shrink to that of or less than the outs and the timing of the outs precede the ins by increasing measures of time.  In other words, for a business to endure, the amount and frequency of the cash coming in must become increasingly greater than the amount and frequency of the cash going out.  The third factor, timing, means that as the time between events causing the expenditure of cash and the receipt of cash resulting from those events increases, the risk to the company likewise increases.

The Treatment:

Price:  While it may appear overly simplistic to state that the amount of cash coming in to a company must exceed that going out, it is a simple truth.  A company must have a certain amount of revenues to cover the expenses of the business, the break-even point.  As revenues increase beyond that point, profitability increases.  However, it is a strange paradox that a company can increase revenues and yet suffer adverse cash consequences.  One way to increase revenues is to increase the price of the product or service.  How strange it is that companies have a tendency to decrease the price in order to stimulate sales volume.

Volume:  Price and volume are unavoidably linked.  Total revenues can be increased by holding price constant and increasing volume, increasing price while holding volume constant or increasing both.  Obviously increasing volume requires the increase in sales.  Companies cannot simply rely on increasing price; increasing the volume of sales must be a priority.

Timing:  One symptom of companies in the danger zone is that they have a long time between sales and collection.  Companies must reduce the time between the incurring of the cost of a making a product or rendering a service and the collection of cash resulting from the sale of those products and services.  One technique for reducing the collection time is to sell products rather than services.  When one buys a product, a hammer for instance, you pay for the product at the time of the sale.  When one sell a service, the service is provided, cost is incurred, an invoice is sent and the customer pays some time – 30, 60, 90, days later.

Cash truly is king.  Owners place themselves and their companies at great peril if they don’t follow these cash flow tips.  This article has addressed three factors impacting cash flow – price, volume and timing.  A wise owner will initiate solutions employing all three factors which form these cash flow tips.


photo credit: Making Money via photopin (license)


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