Managing for Bottom Line Cash Flow, Part Nine
In the world we now live in, financial health requires a commitment to proven retail business fundamentals, a commitment to operational discipline, and a heightened attention to detail.
In my last post, I discussed how self-financing of seasonal working capital needs promotes positive cash flow. Throughout this series of posts, I’ve reviewed a number of proven retail fundamentals that drive positive cash flow. Let’s move on to cash flow management.
Cash Flow Management
The most successful retailers over the next few years will be proficient in maximizing the cash flow from their businesses. Some may do it by generating significant increases. But many, if not most, will do it by skillfully driving cash flow from the revenues they’ve got.
They will build a plan, manage to the plan, and then deliver that plan.
What exactly is a cash flow plan? A cash flow plan:
- Projects all of the transactions that impact the cash account in the General Ledger.
- Projects end-of-month cash balances for the next six to twelve months.
- Compares the current month’s actual results to plan, so that variances can be identified, investigated and corrected.
- Is dynamic, so that future plans can be adjusted to reflect any changes that need to be made.
It’s important to distinguish a cash flow plan from a Statement of Cash Flows. A Statement of Cash Flows is one of the three core financial documents, in addition to a Profit & Loss statement and A Balance Sheet. A statement of Cash Flows looks backwards, and documents the sources and uses of cash during a given fiscal period. A cash flow plan, on the other hand, is an essential management tool, that looks out into the future.
And the benefits of a cash flow plan?
- It enables you to establish monthly budgets and benchmarks for all of your key cash-impact accounts, benchmarks that you can manage to.
- It enables you to identify potential cash pinch points in future months at the earliest possible point in time.
- It gives you the greatest opportunity to develop the widest array of options to deal with potential cash shortfalls.
In the world we now live in, a forward-looking cash flow plan is an essential tool for maximizing the amount of cash flowing from the top line to the bottom line. And consistently generating positive cash flow is an essential ingredient in building long-term financial health and competitiveness.