Cash, Strategy And A Way To Thrive
by Richard BarrettI’m traveling today, so I’d like you to welcome Miles Mochizuki.
Miles is a certified public accountant and principal at M. Mochizuki & Co. He is a CPA and MBA with more than 25 years of experience as a finance executive, auditor and consultant. He is the former CFO of several technology companies in Silicon Valley and a financing specialist who has arranged financing ranging from venture capital, bank and lease financing to multi-million dollar debt and equity offerings on Wall Street. His consulting clients include pre-IPO start-ups and established public companies. You can reach Miles at (925) 413-9198 and miles@mmochizuki.com
Summary
The recession and credit crunch have made cash a strategic asset. While debt and equity financing is still available, these sources of cash have become unreliable and difficult to tap, increasing the importance of operating cash flow.
Optimizing cash flow requires the close scrutiny of incoming and outgoing cash transactions and the implementation of credit, purchasing and strategic decisions that impact cash.
Simply put, maximize cash by spending wisely.
Reduce and Control Expenses
Headcount is a main driver of operating expenses. In good times as well as bad, organizational rightsizing is essential to effective cash management and controlling the company’s “expense burn.” Operating expenses are also strongly influenced by the company’s business model and strategic focus.
Here, the aim should be to reduce complexity by eliminating unprofitable products, markets and customers.
Reducing complexity will also simplify the purchasing process and reduce the required investment in inventory. Operating expenses such as travel and supplies should be examined and nonessential expenses eliminated. The feasibility of a negotiated rent reduction and other contract restructurings should also be considered.
The company should adhere to a regularly scheduled check run, typically once a week as a means of instilling discipline in the disbursements process. During this process, cash disbursements should be prioritized in order of importance to ongoing operations.
This usually means that payroll and essential vendor payments will have a high priority and will take precedence over other disbursements in the event that expected cash inflows do not materialize.
To the extent possible, disbursements should be timed to coincide with cash inflows so as to not unnecessarily deplete the company’s cash reserves.
Overall, the goal of managing cash inflows and outflows is to preserve and, optimally, increase the company’s cash balances so as to provide a financial buffer for operations. This conservative fiscal management will also result in presenting the company in its financial best light for the purposes of bank credit lines and other outside financing.
Weekly Monitoring of Cash Flow
Another component of effective cash management is the preparation and review of a weekly cash flow statement. This report should show in sufficient detail the items comprising cash receipts (cash sales, A/R collections, etc.) and cash disbursements (payroll, benefits, inventory purchases, etc.) for the current week and projected for the next 4 – 8 weeks.
This report should be prepared by accounting with input from sales and purchasing. It should be reviewed by the CFO or Controller, along with the current week’s A/R and A/P agings and check run. Follow-up items from this review should be discussed, as appropriate, with sales, operations and management.
Cash as a Strategic Asset
There is no question that in these uncertain times, cash and ready access to cash are strategically important and may make the difference between winning and losing. A company that manages its cash well will be in a strong position to weather the downturn and take advantage of the opportunities to strengthen its market share.
Conversely, in this economic environment poor cash management can quickly lead to insolvency and bankruptcy.
Image credit: svilen001 on sxc.hu
