| How can you predict, avoid and/or, minimize the | | | | Second, watch sales. Any prolonged (and |
| impact of a cash emergency? Managing cash flow | | | | "prolonged" computes differently for each |
| is every manager's challenge, every day, every | | | | company and industry) drop in sales without a |
| year. Those managers who keep a close eye on | | | | comparable -- and simultaneously emerging -- |
| their daily activity and emerging industry trends | | | | reduction in expenses is a prescription for trouble. |
| can help reduce their company’s exposure | | | | Of course, there is at usually some lag between |
| to the chill of a cash crunch. In an increasingly | | | | sales changes and a compensating contraction in |
| competitive world, you need to be alert. Managing | | | | expenses, but early diagnosis can reduce the |
| cash flow is every manager's challenge, every | | | | negative impacts significantly. Once a changing |
| day, every year. Those managers who keep a | | | | trend has been identified, act promptly or the |
| close eye on their daily activity and emerging | | | | impact of the lag will be more severe. |
| industry trends can help reduce their | | | | Third, review the budget. If short-term borrowing |
| company’s exposure to the chill of a cash | | | | is regularly needed to meet normal operating |
| crunch. | | | | costs, the unavailability of such loans or a sudden |
| How can you predict, avoid and/or, minimize the | | | | change in operating expense could be devastating. |
| impact of a cash emergency?First, pay attention | | | | If ongoing operations cannot be supported by |
| when any cash shortages arise. When cash gets | | | | sales, either more sales are needed, fewer |
| short, pay close attention and be prepared to act. | | | | expenses must be incurred or a combination of |
| Questions to be answered include: | | | | the two is in order. While this sounds very simple, |
| 1. What caused the problem? Pre-payments to | | | | all too many companies hesitate "in hopeful |
| take advantage of special discounts can reduce | | | | anticipation. |
| cash. Transportation strikes, for example, could | | | | " If remedies are not introduced on a timely basis, |
| delay shipments and therefore payments. An | | | | a severe cash crunch could follow. |
| industry (or economy) slowdown will often result | | | | Fourth, keep a close eye on new product |
| in customers stretching out their payables. | | | | development. In many companies, R&D |
| 2. How can you cope? If cash on hand is not | | | | expenditures for new products are often allowed |
| robust, let the special discounts go. It’s | | | | far greater variance from projected budgets than |
| usually more cost-effective to pass on a discount | | | | normal expenditures. After all, when you create |
| than to borrow to overcome a shortfall. Keep up | | | | something new, it is really hard to accurately |
| on the news. If you hear about any threatened | | | | predict costs -- or turnaround time -- at the |
| strikes and/or disruptions to your supply chain, | | | | outset. |
| make sure you have a back-up position. Even if | | | | Failure to keep these costs, and time |
| temporarily more expensive, it can save your | | | | commitments, within bounds or monitor their |
| business by showing your customers your | | | | continuing impact and cost/benefit can lead to |
| reliability and versatility in challenging times. If your | | | | continued funding of projects well beyond when |
| customers are in industries facing hard economic | | | | they should be cut off. Overall cash flow can be |
| times, keep closer tabs on your credit policies and | | | | easily drained into a seemingly bottomless pit, and |
| be active in collections. If necessary, tighten credit | | | | often an entire company is jeopardized by one |
| terms, but use discretion. Being firm but | | | | errant project. |
| supportive to your customers will go a long way | | | | Fifth, beware of pet projects. A pet project is |
| in keeping them in the fold while still giving you a | | | | any organizational activity undertaken for ego |
| better cash flow. Defer purchases and/or | | | | value rather than consistency with the |
| negotiate extended payments if cash gets short. | | | | organization's mission and profit targets. Pet |
| Most importantly, document both the signals of | | | | projects, whether new ventures or ongoing cost |
| problems and your solutions. That way, if the | | | | profit centers, can often lead to cash flow |
| signals happen again, you can refer to prior | | | | problems. All organizations have pet projects from |
| successful action as a first possible solution. | | | | time to time. Failure to recognize and deal with a |
| Imagine possible, but normally unpredictable cash | | | | pet project when a cash crunch looms has been |
| flow challenges. Some problems can’t be | | | | the death knell for many companies. |
| anticipated, so what if scenarios can be | | | | Many cash flow challenges have such simple |
| created. You don't have to get elaborate, but you | | | | origins. Often it’s simply a matter of days, |
| can ask what would happen if there were a flood, | | | | or weeks and they can creep up on you. And the |
| or, as we've experienced more recently, a | | | | daily grind can cloud your vision, encourages false |
| devastating hurricane. What then? Other | | | | hope or distract you just long enough for |
| problems, such as "product sabotage" can only be | | | | problems to take hold. You can learn from past |
| dealt with as they occur. Constructing possible | | | | and/or current cash shortages. You can be |
| scenarios to reduce risks associated with | | | | watchful that sales, budget and R&D costs |
| unforeseeable problems is an important | | | | stay in line. You can keep a lid on pet projects. In |
| management tool. Learn from, and document, | | | | an increasingly competitive world, you need to be |
| each experience, or you may have to repeat it. | | | | alert. |