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Cash Management
in Tough Times
nduring the current economic impacts of the Covid-19 pandemic, the cash management problems all-too-commonly encountered in the emerging business inevitably center on predictability — the realistic prediction of the inflows and outflows of cash, and the unpredictability — of certain adverse events. In even the smallest business, we strive to minimize or eliminate — if possible — the likelihood of unpredictable events and to make all aspects of our operation fully predictable i.e., knowable! For years, the cash flow projections of the shrewd owner/manager of the emerging business were calculated "on the back of an envelope." These calculations were often based upon seasoned and realistic information, and "the back of an envelope" could be an effective planning tool. Today, there is no inherent reason why "the back of an envelope" cannot still be a fine planning tool for the uncomplicated business, although it is being supplanted rapidly by the popularity and versatility of the PC.

          Quite simply, effective cash management is the discipline of determining realistically the amounts and the timing of inflows and outflows of cash over the meaningful future — a period of several weeks to several months for most smaller businesses. It is essential that these determinations be realistic and that this work be done on a regular ongoing basis. However, inadequate cash management is usually not the result of lack of sophistication; it is merely the failure to devote adequate time and attention to this critical management job. Rather bluntly, it is the result of the owner/manager's failure to truly manage cash, to simply hope things will work out okay as they usually have in the past and to rely on happenstance. This inattentive attitude is frequently an invitation to disaster. Effective cash management is the owner/manager's most important job; otherwise, the business will be feeble, uncertain and in jeopardy. Cash is the lifeblood of every business!

          Today, many planning tools are available in addition to the back of an envelope to facilitate cash management. These range from the traditional tablets of multi-columnar worksheets to the more advanced PC-based spreadsheets. While the computer-based spreadsheet programs are fast, versatile and can handle many variables, one must always guard against becoming transfixed with the PC's wondrous manipulative powers and losing sight of the nitty-gritty realities of the business. However, these planning tools do offer us a disciplined framework within which to develop a realistic representation of cash flows.

          Our planning tool should help us to identify all of the cash outflows (expenses and expenditures) as well as the sources of cash inflows (revenues); these are usually arrayed vertically on the matrix we call a spreadsheet. Arrayed horizontally across the spreadsheet are the periods during which each of these cash outflows and inflows are realistically expected to occur; while weekly are most common, different businesses may find daily or even monthly periods to be more useful.

          Cash management is particularly challenging in a lumpy business — project- or job-centered operations in which cash flows are not uniform, but are dependent upon the unique characteristics of each project. Here, a PC-based cash management system can be an invaluable tool for the smaller business. Each project can be planned as a stand-alone venture, and then all projects can be aggregated. This can identify the timing and magnitude of possible cash shortfalls. A profitable order accepted and scheduled at the wrong time under the wrong terms and conditions can be calamitous for the emerging company.

          The PC-based cash management system offers the emerging company the opportunity to examine many alternative production schedules, worker assignments, overtime, outsourcing, supplier choices, delivery dates, and even working capital credits to preclude a cash crisis. The key to forestalling a life-threatening shortfall of cash is predictability — to know the timing and magnitude of all cash outflows and inflows, and when necessary to reschedule operations far enough in advance to alleviate these management emergencies well ahead of time. Today, a cash emergency can be neither tolerated nor excused in even the emerging business.

          Cardio-vascular medicine offers many therapies and surgical procedures to alleviate the insufficient or interrupted flow of blood throughout the body. Quite similarly, a simple cash management system designed specifically for the emerging business offers the tools to alleviate the insufficient or interrupted flow of cash within the company. To assure survival — particularly during this period of severe economic uncertainty, the owner/manager of the emerging business must develop a proficiency with and routinely employ these tools. No job is more important!

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Thomas A. Faulhaber, Editor

Telephone: 617.232.6596 — FAX: 617.232.6674

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September 29, 2023  TAF

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