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Managing Cash Flow - Its All About Communication


Managing cash flow (money coming in vs. money going out) is a critical aspect of running a successful enterprise and never more so than now. Unfortunately, proper management of cash flow is usually neglected in favor of marketing, sales, and new product development. But the lifeblood of any company is cash flow and the CEO’s of growing enterprises need to ensure there is a finger on the pulse. I have seen companies that were on the brink of insolvency and were still spending like there was no tomorrow because the company had no cash flow management system. And, believe it or not, it all comes down to effective communication.


Good cash flow management is comprised of three aspects: forecasting cash availability, and managing Accounts Receivable (A/R) and Accounts Payable (A/P). For larger companies, a bank line of credit (LOC) is a major factor that can smooth out bumps in cash flow. But, it’s a good policy to efficiently manage cash to minimize reliance on a LOC.


The persons responsible for managing these functions need to understand how they can have a positive effect on the business by staying on top of their responsibilities. Senior management must communicate the need, the activities required, and the responsibility.


First, forecasting – The traditional method of forecasting cash flow is the rolling 13-week cash flow forecast which should be updated weekly to reflect actual receipts and disbursements and then reconciled to actual cash in various checking accounts. While valuable in forecasting potential cash shortfalls over a three month period, the downside of the 13-week cash flow model is that it is built on assumptions that, in the short term, may not pan out. A second simpler way to look at cash flow is a two-week forecast. However, both are built on the strength of weekly updates that reflect expected receipts and critical payments. Herein lies the importance of good management of collections and payments and both are founded upon good communication.


Let’s start with managing A/R – Good communication is, again key – Be sure that when you set up a new customer account, someone takes the time to review your terms of sale. This is a critical step and your customers need to know that you are serious about collecting money due to you firm. Most B2B companies provide their customers 30-day payment terms and also allow a discount if payments are made within 10 days of invoice. Unfortunately, many customers will take the discount and pay at 30 to 60 days. DO NOT ALLOW THIS TO HAPPEN or it will become standard practice. Here’s where good communication is essential – for each new customer you need to have someone in your collection department or a key company manager, call the customer at or before the first invoice and establish a friendly relationship with whoever manages their payments. It is essential to be cordial and let them know that yours is a small business and cannot afford to be their bank. Ask them if they will take the discount and pay at 10 days or pay the full amount at 30 days. This “ask” puts the customer payments person in a situation where they are making a commitment. Again, be courteous and friendly – it goes a long way. Establishing this relationship will pay off because the person making payments will generally try to help out. Regular calls to the customer A/P person will reinforce a pattern of prompt payments. The A/R manager should not rely on simply looking at an A/R Aging Statement. They need to know the customers and their payment patterns. They need to be able to call an A/P manager at the customer and get a realistic answer as to when a payment can be expected, especially if a payment becomes overdue. Lastly, if a payment becomes seriously overdue, the A/R manager needs to be able to dig into the weeds and find out why. Was the invoice not consistent with the Purchase Order (PO)? Was there a defective part shipped? Was there an issue with service? And if so, how can these potential snafus be resolved? Communicate the problem internally and solve it! I have seen seriously overdue invoices that might have been written off but for a resolution as simple as revising the invoice to match a PO.


Next, the A/P side. And once more, good communication is key, especially if there is an anticipated cash shortfall. Don’t hide from your creditors. Let them know the situation and find out if a partial payment is acceptable until incoming cash improves. Or, ask if a routine payment can be delayed. Help your management understand the critical payments coming due that need to be made to keep operations moving.


Finally, the person responsible for forecasting needs to meet on a regular basis with the A/P and A/R persons to understand who is threatening to cut off supply and who is holding up payment and why. The two-week short term forecast relies heavily on this information. The forecast person needs to be able to advise senior management of the critical payments that must be made on a priority basis.


In conclusion, whether you are a big, profitable company or a small struggling company, managing cash flow is critical to success. And, as discussed above, maintaining good communications within your company and outside your company with your customers and suppliers is the key to effective cash flow management. If you need help in setting up a cash flow forecast or system to manage cash flow, feel free to contact any TCV Partner.

Doug Zeisel, Managing Partner, TCV

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