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Methods and concepts for Value Based Management (VBM)

Steps Ahead ... Cash Management

Cash is your business's lifeblood. Managed well, your company remains healthy and strong. Managed poorly, your company goes into cardiac arrest. If you haven't considered cash management an important issue, then you're probably undermining your business's short-term stability and its long-term survival. But how can you manage business cash better?

If you increased your sales by 25% to 50% over the next six months, what would happen to your cash balance? Our experience is nine out of 10 managers can't answer this question. That's why so many businesses succeed in growing their business only to end up with an uncomfortable and embarrassing cash flow crisis on their hands.

How Do You Define "Cash Flow"?
Knowing what makes up your cash flow is the first step to avoiding a cash crisis. Most business owners believe their cash flow is defined as the revenues they generate less the expenses they have to pay. Not true. The answer lies in the fact that the accounting rules that govern the creation of financial statements are not about tracking the actual flow of cash through your business. They are focused on measuring profit or loss -- not cash flow. The "bottom line" of the P&L is net income. And net income does not tell you what happened to your cash balance during the period. It merely defines net income based on the accounting rules used to create the income statement. It's an important measurement, but it is only one component of understanding and managing your cash flow.

Cash flow is affected by:

• Accounts receivable
• Inventory
• Accounts payable
• Capital expenditures
• Borrowings and debt service
• Profit or loss
• Other "timing" differences

You have to have a clear picture of how each of these areas affects your cash position in time.



Steps Ahead... cash flow rules:
Rule 1. Cash Is King. It's important to recognize that cash is what keeps your business alive.
Rule 2. Know What You Expect the Cash Balance to be in the next 8 weeks from now and update this view as a rolling forcast every day.

Steps Ahead... uses a set of practical techniques to manage cash flow effectively:

• detailled cash prognoses modelling
• accounts receivable reduction and management
• inventory optimization
• accounts payable management
• etc.

Even the most intelligent and experienced manager will fail if he or she is making business decisions using inaccurate or incomplete cash balances.