The Most Critical Element of Your Business to Focus on Today

Signs are finally trending towards an end point to the COVID Pandemic. Several countries have officially declared an end, and momentum has a way of building towards a common end result in most cases. We will see if that holds over the next few months to find if we are officially past the Pandemic.

For your business, will being past the Pandemic have an effect? Will you or have you experienced a fundamental turning point? The answer to these questions lie in your assessment of human behavior, one of the principal drivers of economic activity. You will be making decisions on how to proceed post-COVID, but what will you be basing those decisions on?

Astute business owners have spent the relative available time these past couple years giving their financial recordkeeping/reporting systems a tune-up so that accurate timely information is at their fingertips. For these business owners, I would like to suggest that concentrating on how the cash flow in your business is structured and operating is where you should put your attention to at this time.

By far and above, the companies we have worked with over the past several years have, in general, found out that a reliance on maintaining a steady cash flow has been a matter of life and death. Too many companies have not survived past COVID due to their reliance on faltering cash flows. In 2020, when businesses were ordered to close, the sudden stop in revenues killed many businesses oftentimes within a week or two. The majority of the closed businesses did not have any concept of what cash flow was until it stopped. Recognition of that came way too late for those businesses.

We are currently at a point where businesses have been trained to think of Government Grants and Loans as cash flow. They aren’t, and in addition, they are going away. Nationally, we are into the next election-cycle, so any additional government assistance will undoubtedly be a matter of debate before it is received in rural America. At this moment, some aide is currently in the pipeline that may come out looking like new programs to deliver fragile businesses from closing, but it is not a reliable ‘fix’ for systemic cash-flow issues. The translation of this is: If your business is not breaking even or better at this time, you should have a program in place to remedy this at once, including how you plan to pay yourself to remain solvent. This is what a concentrated effort to understand your cash flow can help you with.

To concentrate on cash flow, you need to build a cash flow projection. This is what financial modeling comes in, to construct a model of what future earnings and expenditures are likely to be and then analyzing the potential for your business to survive the stress periods that will undoubtedly be revealed. If you are not capable of doing this kind of a study, you need to contact obtain the instruction you need in order to be able to make this a reality for your business.

Proper cash flow analyses include: 

• Inventory Control: Have you leaned-out your inventories to support robust sales but not carrying obsolete items? Are your inventory turns in line with industry norms, or better? 
• Sources and Uses study: Are you tracking where your cash is coming from and where it is spent? If you are not tracking this measure, you might not have a handle on your company’s performance. 
• Managing your Accounts Receivable: What are your collectibles average turn time? Is it increasing or decreasing? Is your eye on your performance? 
• Managing Payables: Are you taking advantages of cash discounts for prompt payment? Are you asking for better terms from your suppliers?
• Credit Review and Mending: How are you allocating your cash assets and are you keeping current with expenses from revenues? 
• Reviews of Cash Controls: Who has access to cash in your business? Are there proper tracking and chain of custody procedures in place that are followed? 
• Developing Realistic Projections: This is the heart of Cash Flow understanding. Using quality projections to forecast upcoming needs and cash balances is key to using your financial information to manage your operation. 
• Cash Management: Are you keeping adequate reserves to manage daily bills? Are you checking your balances to avoid defaults? Are you wisely investing reserves to generate additional income? 
• Capital Acquisition: Do you need money to operate? How do you know that, whether you need it today or will in the future? How are you going to project those needs?
• Understanding your Cash Conversion Cycle: How long is it between being in a cash position, purchasing inventory and converting it back to cash?

If you are building and reading your financial statements on a regular basis and have benchmarked your business against national averages, then the addition of the items just listed should give you a great understanding how your business is weathering the ongoing storm. Or the just completed storm if you prefer to look at it that way. Of course, if your business volume and profitability are not up to 2019 ‘standards’ or your recovery from the effects of the COVID Pandemic are not strong enough from earned revenues and expense controls to demonstrate profitability, then you have work to do with your business’s survival. If so, then it is important you get started today. 

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Marshall Doak is the Director of the Southern Oregon University Small Business Development Center and a huge supporter of innovation and the community that forms around innovation in the economy. In private practice, he works with businesses that plan to transition to new ownership within the next five years, assisting them to build value that can be converted to retirement income when the business sells. He can be reached through: mdoak06@gmail.com or 541-646-4126.