First Things First… Ensuring Liquidity
After God’s grace and providence, an entrepreneur’s most important asset may be liquidity (i.e. enough cash to operate through the upcoming period).When firms run out of cash, it’s “game over”! So, how can you stay on top of this key issue?
First, maintain a forward-looking projection of net cash position by detailing major sources and uses of cash on a rolling basis (e.g., 6-12 months). Smaller businesses should project their cash and P&L at least quarterly and large businesses should do this monthly. These spreadsheets can easily be maintained by your CFO or CPA and help you model ‘what if’ impacts of various assumptions such as sharply reduced orders, slow customer payments, bankruptcy of key customer or supplier, or a tightening of your local bank line of credit. By modeling these scenarios and tracking key liquidity metrics, you can take early action to maintain a solid cash position during a sales slump.
Next, develop the discipline of rank-ordering the contribution margin of every product line, key account or location. When you discover pieces of business with negative contribution margin, either fix them (i.e., more price or less cost) or discontinue them. “Stopping the bleeding” has an immediate pay-off! This is an on-going discipline, involving routine reporting, discussion and remedial action plans, is typically worth a few added points of net profit. If you don’t know your contribution margin, start today to view this data in a key monthly or quarterly analysis and require action to be undertaken to fix any negative items. This will greatly enhance focus and profitability while elevating staff accountability and execution.
Finally, reconsider ‘fixed’ expenses which you’ve budgeted for the current year (e.g., rent, utilities, property taxes, overhead payroll, leases and contracts for maintenance, IT, insurance, equipment, etc.) Constantly look for ways to reduce the fixed cost ‘drag’ on your business by seeking to ‘variable-ize’ and smooth these expenses into even monthly charges which are assigned against the profitability of the product lines or business units that require them. When handled this way, a large portion of your total annual fixed cost will be continually challenged and assigned as period costs to those best able to minimize them.
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LIQUIDITY: 1 of 3 steps to manage your cash flow – "…projection of cash position" http://ow.ly/sQ64 #C12 -Randy
LIQUIDITY: 2 of 3 steps "…rank-ordering the contribution margin of every product line, key acct…" http://ow.ly/sQ7t #C12
LIQUIDITY: 2 of 3 steps "…rank-ordering the contribution margin of every product line, key acct…" http://ow.ly/sQ7t #C12 -Randy