Cash is King
William J. Lieberman
Cash is king. This cliché sounds trite, but after living through the Dot-Com downfall, 9/11 and the great Recession, it’s the single most important rule of the game for small, growing companies. I used to dread getting bad news from my sales team that a client was canceling or a high-profile deal fell through. I would scramble to figure out how to make the next payroll, which involved, on more than one occasion, borrowing against the equity in my home.
As a company, we have weathered many booms and busts over the years, and in the process, learned how to manage the fuel that drives the engine: cash. As a supplier to the finance industry, we have to make sure we’re always on top of our game, especially when it comes to money. Like most things in business, this is easier said than done. Here are five lessons learned we share with clients regarding cash-flow management:
Monitor cash-flow levels. First, put in place a system to monitor your current and forecasted cash levels. This means that you need to have a firm handle on all incoming monies (i.e., receivables or external funding), as well as outgoing (i.e., expenses, payroll, rent, etc.). A spreadsheet is the easiest tool to use. Our model starts with a weekly forecast of collections by client, based on their historical payment patterns. We then forecast our upcoming vendor payments, giving us the best possible picture for the swings in cash levels. If I see any large swings to the negative, I can proactively manage those swings rather than react at the last minute.
Stay cash-flow positive. Do whatever is necessary to get cash -flow positive each and every month. Change your revenue model, increase fees, cut staff, cut salaries, cut discretionary and non-discretionary expenses— whatever it takes. This is the most important lesson we learned.
Establish clear-cut processes. Develop a formal process for managing your receivables. We’ve been able to reduce the average time that receivables were outstanding from 80 to 30 days, a level that is quite amazing given the nature of our business. How did we do this? We started with a communication loop that begins before a client sale is even closed. Our finance team is involved every step of the way and works directly with the sales, implementation and client- service teams. Clients are notified in advance of any changes and our contracts are quite clear on our billing policies. Any late-paying clients get a call from our finance team, and then from our relationship management team to determine if there are any service-related issues occurring.
Develop a back-up plan. If we forecast a cash crunch, we rally the team to determine a back-up plan. For example, a plan could include pushing payables out further than the standard 45 days, offering clients the opportunity to pre-pay for a discount on their fees, cutting non-discretionary expenses, etc. Also, we’ve worked hard to develop a relationship with a commercial lender, so that we have a credit facility in place that enables us to draw down funds on an as-needed basis, backed by our receivables.
Rely on your advisors. Make sure you have external advisors that you can turn to for assistance or advice. Having a group of trusted advisors that have experienced similar pain and suffering is absolutely critical. While they cannot help you avoid every pothole, they can help you minimize the damage. For many members, Forum serves as a great starting point. I also rely on my board of directors for help, among others.
We’ve learned a lot of valuable lessons regarding cash-flow management, but the above five helped us stay on top of our financial future. Today, we remain focused on both profitability and cash flow. By doing so, we have doubled our cash cushion in the past six months, and even better, I no longer have to worry about making payroll. I can now focus on growing the business instead of trying to keep it afloat, which is the ideal position for any entrepreneur.
William is the CEO of stave Financial Systems, a software company that sells incentive compensation solutions to financial services firms. To reach William, you can e-mail him at