Three cash tools that are essential in running your business

A key question that you should constantly be asking of your leadership team is: do we have consistent sources of cash to fuel growth?

Cash is the oxygen for your business and without it sustained growth is difficult, to say the least. There are some important ways that you can optimise and monitor your cash position to ensure growth continues without any surprises.

Here are three key elements that you and your leadership team should be keeping in mind when looking at your cash position, along with some tools you can implement to keep the oxygen flowing.

Cash flow reporting

As you will be well aware, the growth of your business sucks cash – sometimes at quite a pace. Unless you are using a cash flow projection tool, this can happen to you before you even know it.

Cash flow projection, through the use of a rolling 12-month forecast tool, is the key to understanding how and what has affected your cash historically. But more importantly, it should also predict what your cash flow would look like in the future. This tool, if used in a timely and consistent manner, will help you know what your cash balances will look like month-on-month. It will also allow you to make growth decisions with more confidence.

We recommend to our clients that they should have two months of cash reserves in the bank to use them over the tougher months if needed, particularly in such a heavily seasonal country as the UAE. In fact, the most successful companies will hold three to 10 times more cash reserves than their competitors, as advised in the book Great by Choice: Uncertainty, Chaos, and Luck – Why some thrive despite them all by Jim Collins and Morten T Hansen.

Daily cash flow

When we ask clients if they review their cash position daily, surprisingly only around 5 per cent will raise their hands, which is interesting as most of them are fast growth companies.

The most effective way of ensuring your cash flow forecast is accurate is to use a simple daily cash flow report. What cash came into the business and left the business in the past 24 hours and what was the net change?

This will also help you keep cash in mind, see patterns in cash flow change and allow you to react very quickly when required.

The four forces of cash flow

In order to have a financially stable, solid growth company, we recommend paying attention to the four fundamental attributes identified by Greg Crabtree, author of the book Simple numbers, straight talk, big profits.

1. Tax provision – This is not applicable yet in the UAE, but with the implementation of VAT in the coming years, it soon will be. You will need to set aside sufficient cash to cover the quarterly and annual payments.
2. Debt management – Pay off your short-term lines of credit each quarter and keep up to date with longer-term loans.
3. Core capital target – Once debt is paid, build a cash buffer of at least two months’ operating expenses that does not get used.
4. Harvest profits – pay your shareholder dividends and your team bonuses, after all, they helped to get you to the point of making profit.

Profitability analysis

A great question for business leaders to ask is ‘what 20 per cent of our products, customers, locations, sales representatives, and so on, are producing 80 per cent of our gross margin?’

This 80-20 rule, known as the Pareto principle, is alive and kicking in the region. It is therefore important for leadership teams to carry out regular reviews of the range of products and services they offer and how each one contributes to the gross margin of their organisation.

It is a good idea to present the resulting data in the form of a waterfall graph (with the X-axis showing the products and the Y-axis showing the profitability). This will very clearly show the highest profit products and services on the left of the graph, falling to the least profitable on the right-hand side. This process will enable you to eliminate the loss makers, invest more into the profit makers and improve those in-between and hence improve your cash position.

This process also helps leadership teams make more rational decisions on what to start, stop and continue doing within the business.

By using these techniques you will not only have a better idea of your cash flow, but also be able to develop your business in a way that optimises your finances.

Mike Hoff is certified Gazelles International coach and founder and CEO of Mike Hoff Consulting