Cash-Flow Management

Cash-flow management requires a future-focused orientation. You have to anticipate your future

cash inflows and outflows and what actions you may need to take to preserve your liquidity.

Today, even the nonemployee firm can begin this process with simple spreadsheet software.

Slightly larger firms could opt for the user-dedicated software. In either case, cash-flow analysis

requires the owner to focus on the future and to develop effective planning skills.

Cash-flow management also involves activities such as expense control, receivables

management, inventory control, and developing a close relationship with commercial lenders.

The small business owner needs to think about these things every day. Their requirements may

tax many small business operators, but they are essential skills.

• Expense control requires owners or operators to think in terms of constantly seeking out efficiencies and

cost-reduction strategies.

• Receivables management forces owners to think about how to walk the delicate balance of offering

customers the benefits of credit while trying to receive the payments as quickly as possible. They can use

technology and e-business to expedite the cash inflow.

• Effective inventory control translates into an understanding of theABC classification system (sorting

inventory by volume and value), and determining order quantities and reorder points. Inevitably, any

serious consideration of inventory management leads one to the study of “lean”

philosophies. Lean inventory management refers to approaches that focus on minimizing inventory by

eliminating all sources of waste. Lean inventory management inevitably leads its practitioners to adopt a

new process-driven view of the firm and its operations.

• Lastly, attention to cash-flow management recognizes that there may well be periods when cash outflows

will exceed cash inflows. You may have to use commercial loans, equity loans (pledging physical assets for

cash), and/or lines of credit. These may not be offered by a lender at the drop of a hat. Small-business

owners need to anticipate these cash shortfalls and should already have an established working

relationship with a commercial lender.